<PAGE>
As filed with the Securities and Exchange Commission on
February 14, 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. 29 ( X )
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 ( X )
Amendment No. 31 ( 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
New York, New York 10004 60 State Street
Boston, MA 02109
(Name and address of agent for service)
<PAGE>
It is proposed that this filing will become effective (check appropriate box)
( ) immediately upon filing pursuant to paragraph (b)
( ) on (date) pursuant to paragraph (b)
( ) 60 days after filing pursuant to paragraph (a)(1)
( ) On (date)pursuant to paragraph (a)(1)
(X) 75 days after filing pursuant to paragraph (a)(2)
( ) On (date) 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 for its fiscal year ended October 31, 1996.
<PAGE>
GOLDMAN SACHS TRUST
Institutional Shares of
GOLDMAN SACHS FIXED INCOME PORTFOLIOS
GOLDMAN SACHS EQUITY FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- -------- -------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Not Applicable
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 Fund Management
6. Capital Stock and Dividends; Shares of
Other Securities the Trust; Taxation; Addi-
tional Information
7. Purchase of Securities Purchase of Institutional
Being Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Repurchase Redemption of Institutional
Shares; Additional Information
9. Pending Legal Not Applicable
Proceedings
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli-
and Policies cies; Investment Restrictions
14. Management of the Registrant Management
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
Administration Shares of
GOLDMAN SACHS FIXED INCOME PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C> <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 Polic-
ies; Description of Securities;
Risk Factors; Investment Tech-
niques; 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 the
Other Securities Trust; Taxation; Additional
Information
7. Purchase of Securities Purchase of Administration
Being Offered Shares; Net Asset Value;
Additional Information
8. Redemption or Redemption of Administration
Repurchase Shares; Additional Information
9. Pending Legal Not Applicable
Proceedings
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
12. General Information Not Applicable
and History
13. Investment Objectives Investment Objective and Poli-
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 PORTFOLIOS
GOLDMAN SACHS EQUITY FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Not Applicable
4. General Description Cover Page; Fund Highlights;
of Registrant Investment Objective and Poli-
cies; Description of Securities;
Risk Factors; Investment
Techniques; Investment
Restrictions; Portfolio Turn-
over; 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
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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 and Class B Shares
GOLDMAN SACHS FIXED INCOME PORTFOLIOS
GOLDMAN SACHS EQUITY FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
<TABLE>
<CAPTION>
PART A CAPTION
- ------ -------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Fund Highlights
3. Condensed Financial
Information Not Applicable
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
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
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
FST SHARES
OF FINANCIAL SQUARE FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Fund;
Shareholder and Fund Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the Fund;
of Registrant Investment Objective and Policies;
Description of Securities and In
vestment Techniques; Investment
Limitations; Organization and Share
of the Trust
5. Management of the Fund Management; Organization and
Shares of the Trust
6. Capital Stock and Purchase of Shares; Reports to
Other Securities Shareholders; Distributions;
Organization and Shares of the
Trust
7. Purchase of Securities Purchase of Units; Exchanges;
Being Offered Net Asset Value
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Organization and Capitalization
and History
<PAGE>
13. Investment Objectives Investment Policies and practices
of the Funds;Investment Restriction
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization
of Securities
16. Investment Advisory The Adviser, Distributor and other
Services Transfer Agent; Portfolio
Transactions; Custodian and
Subcustodian; Independent Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator,
Distributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
FST ADMINISTRATION SHARES
OF FINANCIAL SQUARE FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Fund;
Shareholder and Fund Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the
of Registrant Fund; Investment Objective and
Policies; Description of Securi-
ties and Investment Techniques;
Investment Limitations; Organiza-
tion and Shares of the Trust
5. Management of the Fund Fund Management; Organization and
Shares of the Trust
6. Capital Stock and Purchase of Shares; Reports to
Other Securities Shareholders; Distributions; Or-
ganization and Shares of the
Trust
7. Purchase of Securities Purchase of Shares; Exchanges;
Net Asset Value
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Organization and Capitalization
and History
<PAGE>
13. Investment Objectives Investment Policies and Practices
and Policies of the Funds;
Investment Restrictions
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization of Securities
16. Investment Advisory The Adviser, Distributor and Ad-
ministrator and Transfer Agent;
Portfolio Transactions; Custodian
and Subcustodian; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator,
Distributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
FST SERVICE SHARES
OF FINANCIAL SQUARE FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Fund;
Shareholder and Fund Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the Fund;
of Registrant Investment Policies; Description
of Securities and Investment
Techniques; Investment Limita-
tions; Organization and Shares of
the Trust
5. Management of the Fund Fund Management; Organization and
Shares of the Trust
6. Capital Stock and Purchase of Shares; Reports to
Other Securities Shareholders; Distributions; Or-
ganization and Shares of the
Trust
7. Purchase of Securities Purchase of Shares; Exchanges;
Being Offered Net Asset Value
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Organization and Capitalization
and History
<PAGE>
13. Investment Objectives Investment Policies and Practices
and Plicies of the Funds; Invest
ment Restrictions
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization
of Securities
16. Investment Advisory and The Adviser, Distributor and Ad-
ministrator and Transfer Agent;
Portfolio Transactions; Custodian
and Subcustodian; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator, Dis-
tributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
FST PREFERRED SHARES
OF FINANCIAL SQUARE FUNDS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- -------- -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Fund;
Shareholder and Fund Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the Fund; In-
of Registrant vestment Policies; Description
Securities and Investment Tech-
niques; Investment Limitations;
Organization and Shares of the
Trust
5. Management of the Fund Management; Organization
and Shares of the Trust
6. Capital Stock and
Other Securities Purchase of Shares; Reports to
Shareholders; Distributions; Tax-
es; Administration; Organization
and Shares of the Trust
7. Purchase of Securities
Being Offered Purchase of Shares; Exchanges;
Net Asset Value
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
<PAGE>
PART B 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 Limi-
tations
14. Management of the Fund Trustees and Officers; the Advis-
er, Administrator, Distributor
and Transfer Agent
15. Control Persons and Trustees and Officers; the Advis-
Principal Holders of er, Administrator, Distributor
Securities and Transfer Agent Organization
and Capitalization
16. Investment Advisory The Adviser, Administrator, Dis-
Other Services tributor and Transfer Agent;
Portfolio Transactions; Custodian
and Subcustodian; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Redemptions
Pricing of Securities
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administra-
tor,Distributor and Transfer
Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
ILA UNITS
OF GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Portfolio;
Unitholder and Portfolio Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the Portfolio;
of Registrant Investment Policies; Description
of Securities and Investment
Techniques; Investment Limita-
tions; Organization and Units of
the Portfolio
5. Management of the Fund Fund Management; Organization
and Units of the Portfolio
6. Capital Stock and Purchase of Units; Reports to
Other Securities Unitholders; Distributions;
Taxes; Organization and Units
of the Portfolio
7. Purchase of Securities Purchase of Units; Exchanges;
Being Offered Net Asset Value
8. Redemption or Repurchase Redemption of Units
9. Pending Legal Proceedings Not Applicable
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
12. General Information Organization and Capitalization
and History
13. Investment Objectives Investment Policies and Practices
and Policies of the Funds; Investment Restric-
tions
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization of Securities
16. Investment Advisory The Adviser, Distributor and
and Other Services Transfer Agent; Portfolio
Transactions; Custodian and
Subcustodian; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator,
Distributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
ILA ADMINISTRATION UNITS
OF GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Portfolio;
Unitholder and Portfolio Expenses
3. Condensed Financial Financial Highlights
Information
4. General Description An Introduction to the Portfolio;
of Registrant Investment Policies; Description
of Securities and Investment
Techniques; Investment Limita-
tions; Organization and Units of
the Portfolio
5. Management of the Fund Management; Organization and
Units of the Portfolio
6. Capital Stock and Purchase of Units; Reports to
Other Securities Unitholders; Distributions;
Taxes; Organization and Units of
the Portfolios
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 B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Organization and Capitalization
and History
<PAGE>
13. Investment Objectives Investment Policies and Practices
and Policies of the Funds; Investment Restrictions
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization
of Securities
16. Investment Advisory The Adviser, Distributor and
Other Services Administrator and Transfer
Agent; Portfolio Transactions;
Custodian and Subcustodian;
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator,
Distributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
ILA SERVICE UNITS
OF GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
1. Cover Page Cover Page
2. Synopsis An Introduction to the Portfolio;
Unitholder and Portfolio Expenses
3. Condensed Financial Not Applicable
Information
4. General Description An Introduction to the Portfolio;
of Registrant Investment Policies; Description
of Securities and Investment
Techniques; Investment Restric-
tions; Organization and Units of
the Portfolio
5. Management of the Fund Management; Organization and
Units of the Portfolio
6. Capital Stock and Purchase of Units; Reports to
Other Securities Unitholders; Distributions;
Taxes; Organization and Units
of the Portfolio
7. Purchase of Securities Purchase of Units; Exchanges;
Being Offered Net Asset Value
8. Redemption or Repurchase Redemption of Units
9. Pending Legal Proceedings Not Applicable
PART B CAPTION
- ------ -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
<PAGE>
12. General Information Organization and Capitalization
and History
13. Investment Objectives Investment Policies and Practices
and Policies of the Funds; Investment Restric-
tions
14. Management of the Fund Management
15. Control Persons and Management; Organization and
Principal Holders Capitalization
of Securities
16. Investment Advisory and The Adviser, Distributor, and
Other Services Administrator and Transfer Agent;
Portfolio Transactions; Custodian
and Subcustodian; Independent
Accountants
17. Brokerage Allocation Portfolio Transactions
18. Capital Stock and Organization and Capitalization
Other Securities
19. Purchase, Redemption and Net Asset Value; Shareholder
Pricing of Securities Investment Account; Redemptions
Being Offered
20. Tax Status Tax Information
21. Underwriters The Adviser, Administrator,
Distributor and Transfer Agent
22. Calculation of Calculation of Yield Quotations
Performance Data
23. Financial Statements Financial Statements
<PAGE>
GOLDMAN SACHS TRUST
GOLDMAN SACHS MONEY MARKET FUNDS
ILA SERVICE UNITS
ILA CLASS B UNITS
OF INSTITUTIONAL LIQUID ASSETS PORTFOLIOS
---------------
CROSS REFERENCE SHEET
(as required by Rule 485)
PART A CAPTION
- ------ -------
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 Not Applicable
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
7. Purchase of Securities Purchase of Units;
Exchanges; Net Asset Value
8. Redemption or Repurchase Redemption of Units
9. Pending Legal Proceedings Not Applicable
<PAGE>
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
23. Financial Statements Financial Statements
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>
SUBJECT TO COMPLETION DATED FEBRUARY 14, 1997
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+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
May 1, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights........................
Fees and Expenses......................
Financial Highlights...................
Investment Objectives and Policies.....
Description of Securities..............
Investment Techniques..................
Risk Factors...........................
Investment Restrictions................
Portfolio Turnover.....................
Management.............................
Net Asset Value........................
Performance Information................
Shares of the Trust....................
Taxation...............................
Additional Information.................
Additional Services....................
Reports to Shareholders................
Dividends..............................
Purchase of Service Shares.............
Exchange Privilege.....................
Redemption of Service Shares...........
</TABLE>
GOLDMAN SACHS
EQUITY FUNDS
SERVICE SHARES
GOLDMAN SACHS CORE LARGE CAP
GROWTH FUND
Seeks long-term growth of capital through
investment in a broadly diversified portfo-
lio of large cap U.S. equity securities
that are expected to have better prospects
for earnings growth than the general domes-
tic economy. Dividend yield is a secondary
consideration.
GOLDMAN SACHS CORE U.S. EQUITY FUND
Seeks long-term growth of capital and divi-
dend 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.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and
growth of income through investments in eq-
uity securities that are considered to have
favorable prospects for capital apprecia-
tion and/or dividend paying ability.
GOLDMAN SACHS GROWTH FUND
Seeks long-term growth of capital through a
focused portfolio of investments in equity
securities of companies that are considered
to have long-term capital appreciation po-
tential.
GOLDMAN SACHS MID CAP EQUITY FUND
Seeks long-term capital appreciation pri-
marily through investments in equity secu-
rities of companies with public stock mar-
ket capitalizations of between $500 million
and $7 billion at the time of investment.
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 principally
traded outside the U.S.
(continued on next page)
---------
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 SERVICE SHARES OF THE FUNDS
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>
(continued from previous page)
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital apprecia-
tion through investments in equity
securities of companies related
(in the manner described herein)
to Asian countries.
GOLDMAN SACHS EMERGING MARKETS
EQUITY FUND
Seeks long-term capital apprecia-
tion through investments in equity
securities of emerging country is-
suers.
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 AND AFRICAN AND OTHER EMERGING
COUNTRIES IN WHICH THE INTERNATIONAL EQUITY, ASIA GROWTH AND EMERGING MARKETS
EQUITY FUNDS INVEST 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 IS 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."
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 CORE Large Cap Growth, Growth and Income, Growth and
Mid 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 Fund (formerly the "Select Equity Fund"). Goldman Sachs Asset
Management International ("GSAMI"), London, England, an affiliate of Goldman
Sachs, serves as investment adviser to the International Equity, Asia Growth
and Emerging Markets Equity 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 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 institutions ("Service Organizations") that
hold, directly or through an agent, Service Shares for the benefit of their
customers, or Goldman Sachs by calling the telephone number, or writing to one
of the addresses, listed on the back cover of this Prospectus.
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 GOLDMAN SACHS TRUST?
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
- ---------------- ------------------------ ----------------------- ---------------------
CORE LARGE CAP Long-term growth of At least 90% of total Russell 1000 Growth
GROWTH FUND capital through assets in equity Index
investment in a broadly securities of U.S.
diversified portfolio of issuers. The Fund's
large cap U.S. equity investments are
securities that are selected using both a
expected to have better variety of quantitative
prospects for earnings techniques and
growth than the general fundamental research in
domestic economy. seeking to maximize the
Dividend yield is a Fund's reward to risk
secondary consideration. ratio. The Fund's
portfolio is designed
to have risk, style,
capitalization and
industry
characteristics similar
to the Russell 1000
Growth Index.
- ----------------------------------------------------------------------------------------
CORE U.S. Long-term growth of At least 90% of total The S&P 500 Index
EQUITY FUND capital and dividend assets in equity
income through securities of U.S.
investment in a broadly issuers. The Fund's
diversified portfolio of investments are
predominantly large cap selected using both a
and blue chip equity variety of quantitative
securities representing techniques and
all major sectors of the fundamental research
U.S. economy. which seek 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 NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
- ---------------- ---------------------- ---------------------- ----------------------
GROWTH AND Long-term growth of At least 65% of total The S&P 500 Index
INCOME FUND capital and growth of assets in equity
income. securities that the
Investment Adviser
considers to have
favorable prospects
for
capital appreciation
and/or dividend paying
ability.
- ----------------------------------------------------------------------------------------
GROWTH FUND Long-term capital At least 90% of total The S&P 500 Index
growth. assets in a focused
portfolio of equity
securities (including
convertible
securities). The
Investment Adviser
considers long-term
capital appreciation
potential in selecting
investments.
- ----------------------------------------------------------------------------------------
MID CAP EQUITY Long-term capital At least 65% of total The Russell Midcap
FUND appreciation. assets in Index
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 The FT-Actuaries
EQUITY FUND appreciation. at least 65%, of total Europe and Pacific
assets in equity Index (unhedged)
securities
of companies 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.
- ----------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and The (MSCI) Morgan
FUND appreciation. at least 65%, of total Stanley Capital
assets in equity International AC Asia
securities Free ex Japan Index
of companies in China, (unhedged)
Hong Kong, India,
Indonesia, Malaysia,
Pakistan, the
Philippines,
Singapore, South
Korea, Sri Lanka,
Taiwan and Thailand.
The Fund may employ
certain currency
management techniques.
- ----------------------------------------------------------------------------------------
EMERGING Long-term capital Substantially all, and The Morgan Stanley
MARKETS EQUITY appreciation. at least 65%, of its Capital International
FUND total assets in equity Emerging Markets Free
securities of emerging Index
country issuers. 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 to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a
Fund may be exposed to a higher degree of risk and price volatility because
such securities may lack sufficient market liquidity to enable the 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 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, Asia Growth and Emerging Markets Equity
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 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 CORE
Large Cap Growth, Growth and Income, Growth and Mid Cap Equity Funds.
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
CORE U.S. Equity Fund. Goldman Sachs Asset Management International serves
as Investment Adviser to the International Equity, Asia Growth and Emerging
Markets Equity Funds. As of April , 1997, the Investment Advisers,
together with their 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 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.
5
<PAGE>
HOW DO I PURCHASE SERVICE SHARES?
It is expected that all purchasers of Service Shares of a Fund will be
Service Organizations or their nominees. 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>
CORE Large Cap Growth................. Annually Annually
CORE U.S. Equity...................... Annually Annually
Growth and Income..................... Quarterly Annually
Growth................................ Annually Annually
Mid Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Asia Growth........................... Annually Annually
Emerging Markets Equity............... Annually Annually
</TABLE>
Recordholders of Service Shares 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 or the corresponding class of any portfolio of a
Goldman Sachs Money Market Fund. For further information concerning
dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES
(SERVICE SHARES)*
<TABLE>
<CAPTION>
CORE CORE GROWTH EMERGING
LARGE CAP U.S. AND MID CAP INT'L ASIA MARKETS
GROWTH EQUITY INCOME GROWTH EQUITY EQUITY GROWTH EQUITY
FUND FUND FUND FUND FUND FUND FUND FUND
--------- ------ ------ ------ ------- ------ ------ --------
<S> <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
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)**............. 0.60% 0.59% 0.70% 0.75% 0.75% 0.86% 0.86% 1.10%
Service Fees***....... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses (after
expense limita-
tion)**.............. 0.05% 0.06% 0.15% 0.10% 0.10% 0.24% 0.24% 0.20%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER
EXPENSE
LIMITATIONS)**...... 1.15% 1.15% 1.35% 1.35% 1.35% 1.60% 1.60% 1.80%
==== ==== ==== ==== ==== ==== ==== ====
</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:
CORE Large Cap Growth Fund.................... $ 12 $ 37 N/A N/A
CORE U.S. Equity Fund......................... $ $ $ $
Growth and Income Fund........................ $ $ $ $
Growth Fund................................... $ 14 $ 43 N/A N/A
Mid Cap Equity Fund........................... $ $
International Equity Fund..................... $ $ $ $
Asia Growth Fund.............................. $ $ $ $
Emerging Markets Equity Fund.................. $ 18 $ 57 N/A N/A
</TABLE>
- ---------------------
* 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 and
Class B 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 and Class B Shares may be obtained from an investor's sales
representative or from Goldman Sachs by calling the number on the back of
this Prospectus.
** Based on estimated amounts for the current fiscal year.
*** Service Organizations (other than broker-dealers) 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."
7
<PAGE>
The table below states the management fees which the Investment Advisers
have voluntarily agreed to limit and what the management fees would be
without such limitations (as a percentage of average daily net assets):
<TABLE>
<CAPTION>
MANAGEMENT MANAGEMENT
FEE WITH FEE WITHOUT
LIMITATIONS LIMITATIONS
----------- -----------
<S> <C> <C>
CORE Large Cap Growth................................
CORE U.S. Equity.....................................
Growth and Income....................................
Growth...............................................
Mid Cap Equity.......................................
International Equity.................................
Asia Growth..........................................
Emerging Markets Equity..............................
</TABLE>
The Investment Advisers have voluntarily agreed to reduce or limit certain
"Other Expenses" of the Funds (excluding transfer agency fees estimated to
be 0.04% of average daily net assets (applicable to the Growth and Income
and Mid-Cap Equity Funds only), management fees and fees under service,
distribution and authorized dealer service plans, taxes, interest and
brokerage and litigation, indemnification and other extraordinary expenses)
of the following average daily net assets:
<TABLE>
<CAPTION>
OTHER
EXPENSES
--------
<S> <C>
CORE Large-Cap Growth............................................... %
CORE U.S. Equity.................................................... %
Growth and Income................................................... %
Growth.............................................................. %
Mid-Cap Growth...................................................... %
International Equity................................................ %
Asia Growth......................................................... %
Emerging Market Equity.............................................. %
</TABLE>
The Investment Advisers have no current intention of modifying or
discontinuing such limitations but may do so in the future at their
discretion. With regard to the CORE U.S. Equity, International Equity, Asia
Growth and Emerging Markets Equity Funds, Goldman Sachs does not impose
transfer agency fees pursuant to its contract with the Funds. If the
Investment Advisers and Goldman Sachs did not agree to limit certain "Other
Expenses" of each Fund and to limit the fees of the CORE U.S. Equity,
International Equity, Asia Growth and Emerging Markets Equity Funds as
described above, the "Other Expenses" and "Total Operating Expenses" of the
Service Shares of the Funds would be as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
CORE Large-Cap Growth..................................... % %
CORE U.S. Equity.......................................... % %
Growth and Income......................................... % %
Growth.................................................... % %
Mid-Cap Equity............................................ % %
International Equity...................................... % %
Asia Growth Fund.......................................... % %
Emerging Market Equity.................................... % %
</TABLE>
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 upon estimated fees and expenses for the
current year 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
, 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, Growth and Emerging Markets Equity Funds. Accordingly, there are
no financial highlights for these Funds.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------- -------------------------------------
NET REALIZED FROM NET
AND UNREALIZED TOTAL REALIZED
NET ASSET GAIN (LOSS) ON INCOME GAIN ON TOTAL
VALUE, NET INVESTMENTS, (LOSS) FROM FROM NET INVESTMENT DISTRIBUTIONS
BEGINNING INVESTMENT OPTIONS AND INVESTMENT INVESTMENT AND FUTURES TO
OF PERIOD INCOME FUTURES OPERATIONS INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- -------------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
RATIOS ASSUMING
VOLUNTARY WAIVERTOTAL
DISTRIBOF FEES ORUTIONS
EXPENSE LIMITATIONS
------------------------------
NET RATIO OF NET RATIO OF
INCREASE RATIO OF NET ASSETS NET
(DECREASE) NET ASSET NET INVESTMENT AT END RATIO OF INVESTMENT
IN NET VALUE, EXPENSES INCOME PORTFOLIO OF EXPENSES INCOME
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(A) NET ASSETS NET ASSETS RATE (IN 000'S) NET ASSETS NET ASSETS
---------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
SELECT EQUITY FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------ ----------------------------------------------------
FROM NET
<CAPTION> NET REALIZED TOTAL REALIZED
NET ASSET AND UNREALIZED INCOME GAIN ON IN EXCESS NET
VALUE, NET GAIN ON FROM FROM NET INVESTMENT OF NET TOTAL ADDITIONAL INCREASE
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT AND OPTION INVESTMENT DISTRIBUTIONS TO PAID-IN IN NET
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME TRANSACTIONS INCOME SHAREHOLDERS CAPITAL ASSET VALUE
--------- ---------- -------------- ---------- ---------- ------------ ---------- ----------------- ---------- -----------
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MID-CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF NET NET INVESTMENT
NET ASSET NET INVESTMENT ASSETS AT RATIO OF INCOME
VALUE, EXPENSES TO INCOME TO PORTFOLIO END OF EXPENSES (LOSS)
END OF TOTAL AVERAGE NET AVERAGE NET TURNOVER PERIOD TO AVERAGE TO AVERAGE
PERIOD RETURN(A) ASSETS ASSETS RATE (IN 000S) NET ASSETS NET ASSETS
--------- --------- ----------- ------------ --------- --------- ----------- -----------
GROWTH AND INCOME FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MID-CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------- ------------------------------------------------
NET REALIZED NET REALIZED
AND AND FROM NET
UNREALIZED UNREALIZED TOTAL REALIZED NET
GAIN (LOSS) GAIN (LOSS) INCOME GAIN ON INCREASE NET
NET ASSET NET ON ON FOREIGN (LOSS) IN EXCESS INVESTMENT, TOTAL (DECREASE) ASSET
VALUE, INVESTMENT INVESTMENTS, CURRENCY FROM FROM NET OF NET OPTION AND DISTRIBUTIONS IN NET VALUE,
BEGINNING INCOME OPTIONS AND RELATED INVESTMENT INVESTMENT INVESTMENT FUTURES TO ASSET END OF
OF PERIOD (LOSS) FUTURES TRANSACTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS VALUE PERIOD
--------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------- ---------- ------
INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASIA GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<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
TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
RETURN(A) ASSETS NET ASSETS RATE 000S) ASSETS NET ASSETS
- --------- -------- ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------
</TABLE>
11
<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 of companies ("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 a macro analysis of
numerous economic and valuation variables to determine and 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 believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
Value Style Funds. The Goldman Sachs Growth and Income and Mid Cap Equity
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 market 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 Goldman Sachs Growth, International Equity, Asia
Growth and Emerging Markets Equity 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 Advisers will select
securities of growth companies trading in the Investment Advisers' 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 Advisers will ordinarily look 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.
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Quantitative Style Funds. The CORE Large Cap Growth and CORE U.S. Equity
Funds are managed using both quantitative and fundamental techniques. CORE is
an acronym for "Computer-Optimized, Research-Enhanced," which encapsulates the
Fund's investment process. Equity securities are evaluated using both a
proprietary quantitative multifactor model and the investment opinions of
Goldman Sachs' research analysts. The Investment Adviser then uses
computerized optimization techniques to construct diversified portfolios
consisting of stock that are highly rated both by the Investment Adviser's
proprietary multifactor model and by Goldman Sachs' research analysts. The
optimizer seeks to balance expected returns against portfolio risk in an
effort to find the portfolio with the optimal risk to reward trade-off
relative to the Fund's investment objectives.
CORE LARGE CAP GROWTH
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital through investment in a broadly diversified
portfolio of large cap U.S. equity securities that are expected to have better
prospects for earnings growth than the general domestic economy. Dividend
yield 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 seeks to achieve its investment objective by
investing in a portfolio of equity securities 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 may invest only in those fixed income securities that
are considered cash equivalents.
Investment Process. The Investment Adviser begins with a universe consisting
primarily of blue chip and other large capitalization equity securities. The
Investment Adviser uses a proprietary multifactor model (the "Multifactor
Model") to assign each equity security a rating, and, if the security is
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 selecting securities for the Fund, the Investment
Adviser utilizes optimization models to evaluate the ratings assigned by the
Multifactor Model and the Research Department to build a diversified
portfolio. This portfolio is primarily comprised of securities rated highest
by the Investment Adviser's Multifactor Model and research analysts and has
risk characteristics and industry weightings similar to those of the Russell
1000 Growth Index. Companies in which the Fund will invest are intended to
have above-average capitalization, volatility and earnings growth expectations
and below-average dividend yields. Under normal conditions, the securities of
any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated 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, 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
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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, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." The ratings reflect the analysts final judgement as to the
investment results of a specific security and incorporates the 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., the
analyst's ratings) method of selecting securities, the Fund seeks to
capitalize on the strengths of each discipline.
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 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.
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 seeks to achieve its
investment objective by investing in a portfolio of equity securities 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 those of the S&P 500 Index. The Fund will seek to have broad
representation in most major sectors of the U.S. economy and be comprised of
companies with above average capitalizations, average growth prospects, and
average dividend yields. The Fund may invest only in those fixed income
securities that are considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Investment Process," "Multifactor Model" and "Research Department"
under "CORE LARGE CAP GROWTH FUND."
GROWTH AND INCOME FUND
Objectives. The Growth and Income 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 countries with emerging markets and economies and securities quoted in
foreign currencies.
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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 (including convertible
securities). The Fund seeks to achieve its investment objective by investing
primarily in a focused portfolio of equity securities that are considered by
the Investment Adviser to have long-term capital appreciation potential.
Although the Fund is a diversified fund, the Investment Adviser expects to
concentrate the Fund's investments in a focused number of issuers.
Other. Up to 10% of the Fund's total assets may be invested in foreign
securities, including securities of issuers in countries with emerging markets
and economies and securities quoted in foreign currencies.
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, Mid Cap Equity 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
countries with emerging markets and economies.
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 companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. 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.
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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." Up to 35% of the
Fund's total assets may be invested in fixed income securities.
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
Countries," which are not present in investments in more developed 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 up to 35% of its total assets in
equity securities of issuers in other countries, including Japan, and in fixed
income securities.
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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
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, Korea, Malaysia, Mexico, Morocco, Pakistan,
Peru, the Philippines, Poland, Portugal, Russia, Singapore, South Africa, Sri
Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. At the Investment
Adviser's discretion, the Fund may invest in other Emerging Countries.
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
Countries," 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 enhance total 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.
dollar-denominated securities of U.S. issuers. 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. The Investment Adviser used the value
based approach discussed above in selecting particular industries and 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.
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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
securities in which the CORE Large Cap Growth and CORE U.S. 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. 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. 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 taxes on dividend or interest payments, limitations on the removal
of funds or other assets, political or social instability or diplomatic
developments which could affect investments in those countries.
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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 CORE Large Cap Growth and CORE U.S. 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 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 International
Equity, Asia Growth and Emerging Markets Equity 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 International Equity, Asia
Growth and Emerging Markets Equity 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 International Equity, Asia Growth and Emerging
Markets Equity 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 International Equity, Asia Growth and Emerging Markets Equity
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, as permitted by applicable law, 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,
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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 authorized for use by the
International Equity, Asia Growth and Emerging Markets Equity Funds, offer
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 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity, Asia Growth and Emerging Markets Equity
Funds may 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
Asia Growth or Emerging Markets Equity 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 International Equity, Asia Growth and
Emerging Markets Equity 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
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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 principal 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
Large Cap Growth and CORE U.S. 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 Large Cap Growth and
CORE U.S. 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.
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 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. Each Fund (other than CORE Large Cap Growth and CORE U.S.
Equity Funds, which only invest in debt instruments that are cash equivalents)
may invest in debt securities, except as noted below,
21
<PAGE>
rated at least investment grade at the time of investment. Investment grade
debt securities are securities rated BBB or higher by Standard & Poor's
Ratings Group ("Standard & Poor's") or Baa or higher by Moody's Investors
Service, Inc. ("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 Growth and Income, Growth, International Equity, Asia Growth and
Emerging Markets Equity Funds may invest up to 10%, 10%, 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 in the BBB or Baa category 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. 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. 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 Large Cap Growth and CORE U.S. Select Equity
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
22
<PAGE>
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.
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 International Equity, Asia Growth and
Emerging Markets Equity 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 International
Equity, Asia Growth and Emerging Markets Equity 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 Large Cap Growth and CORE U.S.
Equity Funds may enter into such transactions only with respect to the
S&P/BARRA Growth Index or S&P 500 Index, respectively. 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, as permitted by applicable law, 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
23
<PAGE>
options on futures, unanticipated changes in interest rates, securities prices
or currency exchange rates 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 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 3-day settlement period. A Fund is required
to hold and maintain in a segregated account with the Fund's custodian until 3
days prior to the settlement date, cash or liquid assets, as permitted by
applicable law, 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, swaps, 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 the specific restricted security,
that such restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933, as amended ("1933 Act"), and, therefore, is liquid.
The Trustees has adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities. The Trustees, however, retains oversight focusing on factors such
as valuation, liquidity and availability of information and is 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 of
their repurchase obligation. The International Equity, Asia Growth and
Emerging Market Equity Funds may
24
<PAGE>
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 of the Trust
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. See "Investment Restrictions" in the Additional
Statement. 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 Large Cap Growth and CORE U.S. 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.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the CORE Large Cap Growth and CORE U.S. 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 (International Equity, Asia Growth and Emerging Market
Equity Funds only), (iii) other investment companies and (iv) unseasoned
companies. For more information see the Additional Statement.
25
<PAGE>
RISK FACTORS
RISK OF INVESTING IN SMALL TO MEDIUM CAPITALIZATION COMPANIES. Investing in
the securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small to medium 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, Asia Growth and Emerging Markets
Equity Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Growth and Income
and Mid Cap Equity Funds may each invest up to 15% and the Growth Fund may
invest up to 10% of their total assets in securities of issuers in countries
with emerging economies or securities markets. 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 computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser and its affiliates and their
respective clients and other service providers.
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
26
<PAGE>
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.
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 transactions in foreign currency, forward
foreign currency exchange contracts, options, futures contracts and certain
other 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. All investment
objectives and 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
the Fund remains an appropriate investment in light of their then current
financial positions and needs.
27
<PAGE>
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, Growth and
Emerging Markets Equity Funds) historical portfolio turnover ratio. It is
anticipated that the annual portfolio turnover rates of the CORE Large Cap
Growth, Growth and Emerging Markets Equity Funds will generally not exceed
70%, 30% 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.
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 CORE Large Cap Growth, Growth and Income,
Growth and Mid 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 Fund.
Goldman Sachs Funds Management, L.P. registered as an investment adviser in
1990. Goldman Sachs Asset Management International, 140 Fleet Street, London
EC4A 2BJ, England, an affiliate of Goldman Sachs, serves as the investment
adviser to the International Equity, Asia Growth and Emerging Markets Equity
Funds. Goldman Sachs Asset Management International is regulated by the
Investment Management Regulatory Organisation Limited and registered as an
investment adviser in 1991. As of April , 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
28
<PAGE>
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.
Under the Management Agreements, 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.
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 Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- -----------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager-- Since Mr. Anderson joined the
Vice President Growth and Income 1996 Investment Adviser in
1992. Prior to 1992, he
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
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.
- -----------------------------------------------------------------------------------------
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
was studying for a Ph.D.
in finance at the
University of Chicago.
- -----------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager-- Since Mr. Collins joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- -----------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was the Chief Investment
Officer of Liberty
Investment Management,
Inc., and its
predecessor firm.
- -----------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- -----------------------------------------------------------------------------------------
Ronald E. Gutfleish Senior Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income 1993 Investment Adviser in
1993. Prior to 1993, he
was a principal of
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,
Mr. Jones was a senior
quantitative analyst in
the Research Department.
- -----------------------------------------------------------------------------------------
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.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Alice Lui Portfolio Manager-- Since Ms. Lui joined the
Vice President Asia Growth 1994 Investment Adviser in
1990. Prior to 1990, she
was a management
consultant with Andersen
Consulting in Hong Kong.
- --------------------------------------------------------------------------------------------
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
Securities International
and for a period at
Manufacturers Hanover
Bank in New York.
- --------------------------------------------------------------------------------------------
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 Bankers Trust Australia
Equity 1997 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.
- --------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- --------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- --------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
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.
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
FUND RATE* JANUARY 31, 1997*
---- ----------- -----------------
<S> <C> <C>
GSAM
CORE Large Cap Growth........................ % %
Growth and Income............................ 0.70% %
Growth....................................... % %
Mid Cap Equity............................... 1.00% %
GSFM
CORE U.S. Equity............................. 0.75% %
GSAMI
International Equity......................... 1.00% %
Asia Growth.................................. 1.00% %
Emerging Markets Equity......................
</TABLE>
- ---------------------
*With respect to the CORE U.S. Equity, Mid Cap Equity, International Equity
and Asia Growth Funds, Management Agreements combining both advisory and
administrative services were adopted effective April 30,
30
<PAGE>
1997. The contractual rate set forth in the table is the rate under the
Management Agreement and is identical to the aggregate advisory and
administration fee rate 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 differences, if any, between
the stated advisory fee and the actual advisory fees paid by the Funds reflects
the fact that the Advisers did not charge the full amount of the advisory 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 Adviser to the CORE Large Cap Growth, CORE U.S. Equity, Growth
and Income, Growth, International Equity, Asia Growth and Emerging Markets
Equity Funds has 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 in the case of CORE Large Cap Growth, CORE
U.S. Equity, Growth and Income, Growth, International Equity, Asia Growth and
Emerging Markets Equity Funds, transfer agency fees) to the extent such
expenses exceed %, %, %, % and % 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 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
"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 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 Large Cap Growth, CORE U.S. Equity, Growth, International Equity, Asia
Growth and Emerging Markets Equity Funds with respect to Institutional or
Service Shares. Goldman Sachs is entitled to receive a transfer agency fee from
the Growth and Income and Mid Cap Equity Funds equal to 0.04% of the average
daily net assets of the Institutional and Service Shares of such Funds.
31
<PAGE>
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.
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Growth and Income Fund may publish its 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 performance rankings and indices.
The Growth and Income 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 Growth and Income 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.
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.
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.
32
<PAGE>
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. The CORE Large Cap Growth, CORE U.S. Equity, Growth
and Income, Growth, International Equity, Asia Growth and Emerging Markets
Funds offer four classes of shares: Institutional Shares, Service Shares,
Class A Shares and Class B Shares. The Mid Cap Equity Fund offers two classes
of shares: Institutional Shares and Service Shares.
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 entitle their holders to one vote per share, are freely transferable
and have no preemptive, subscription or conversion rights.
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. The Trustees, however, 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, Growth 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, each 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, each 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.
33
<PAGE>
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
International Equity, Asia Growth and Emerging Markets Equity Funds are not
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 on which a
shareholder may recognize a gain or loss.
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 intangibles 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.
34
<PAGE>
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 (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
35
<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 Service Organizations
for providing account administration and personal and account maintenance serv-
ices 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 pur-
chase, redeem or exchange Service Shares for customers, responding to inquiries
from prospective and existing shareholders and assisting customers with invest-
ment procedures.
For the fiscal year ended January 31, 1997, [insert Fund names] were
outstanding.
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 (other than broker-dealers) 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 a Fund. The Trust, on behalf of the
Funds, accrues payments made pursuant to a Service Agreement daily. All inqui-
ries 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.
36
<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 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 (or portions
thereof) 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 distribu-
tions, 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
It is expected that all direct purchasers of Service Shares of the Funds will
be Service Organizations or their nominees. 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 or-
der. No sales load will be charged. If, by the close of regular trading on the
New York Stock Exchange (currently 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 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 pur-
chased by check may be delayed for a period of time as described under "Redemp-
tion of Service Shares."
37
<PAGE>
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 (ex-
cept that a check drawn on a foreign bank or we reserve the right not to ac-
cept a third party check will not be accepted) 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 Organi-
zation whose account balance is less than $50 as a result of earlier redemp-
tions. Such redemptions will not be implemented if the value of such share-
holder'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 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) by a particular purchaser (or group of
related purchasers). This may occur, for example, when a purchaser's pattern
of frequent purchases, sales or exchanges of Service Shares of a Fund is evi-
dent, or if purchase, sales, or exchanges are, or a subsequent abrupt redemp-
tion might be, of a size that would disrupt management of the Funds.
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 portfolio of a 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 3:00 p.m. Chicago 38
<PAGE>
time). A shareholder should obtain and read the prospectus relating to any
other fund and its shares or units and consider its investment objective, pol-
icies 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 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 portfolio of a 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 limita-
tions. 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 af-
ter 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 re-
quests 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 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.]
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), 39
<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.
--------------------
40
<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
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQ1SS/4.5k/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS EQUITY
FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
SERVICE SHARES
LOGO
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 FEBRUARY 14, 1997
PROSPECTUS
May 1, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights........................
Fees and Expenses......................
Financial Highlights...................
Investment Objectives and Policies.....
Description of Securities..............
Investment Techniques..................
Risk Factors...........................
Investment Restrictions................
Portfolio Turnover.....................
Management.............................
Net Asset Value........................
Performance Information................
Shares of the Trust....................
Taxation...............................
Additional Information.................
Reports to Shareholders................
Dividends..............................
Purchase of Institutional Shares.......
Exchange Privilege.....................
Redemption of Institutional Shares.....
Appendix ..............................
Account Information Form
</TABLE>
GOLDMAN SACHS EQUITY FUNDS INSTITUTIONAL
SHARES
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
Seeks long-term growth of capital through
investment in a broadly diversified portfo-
lio of large cap U.S. equity securities
that are expected to have better prospects
for earnings growth than the general domes-
tic economy. Dividend yield is a secondary
consideration.
GOLDMAN SACHS CORE U.S. EQUITY FUND
Seeks long-term growth of capital and divi-
dend 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.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and
growth of income through investments in eq-
uity securities that are considered to have
favorable prospects for capital apprecia-
tion and/or dividend paying ability.
GOLDMAN SACHS GROWTH FUND
Seeks long-term growth of capital through a
focused portfolio of investments in equity
securities of companies that are considered
to have long-term capital appreciation
potential.
GOLDMAN SACHS MID CAP EQUITY FUND
Seeks long-term capital appreciation pri-
marily through investments in equity secu-
rities of companies with public stock mar-
ket capitalizations of between $500 million
and $7 billion at the time of investment.
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 principally
traded outside the U.S.
(Continued on next page)
---------
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 INSTITUTIONAL
SHARES OF THE FUNDS 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>
(Continued from previous page)
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital apprecia-
tion through investments in equity
securities of companies related (in
the manner described herein) to
Asian countries.
GOLDMAN SACHS EMERGING MARKETS EQUITY
FUND
Seeks long-term capital apprecia-
tion through investments in equity
securities of emerging country is-
suers.
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 AND AFRICAN AND OTHER EMERGING
COUNTRIES IN WHICH THE INTERNATIONAL EQUITY, ASIA GROWTH AND EMERGING MARKETS
EQUITY FUNDS INVEST 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 IS 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."
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 CORE Large Cap Growth, Growth and Income, Growth and
Mid 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 Fund (formerly the "Select Equity Fund"). Goldman Sachs Asset
Management International ("GSAMI"), London, England, an affiliate of Goldman
Sachs, serves as investment adviser to the International Equity, Asia Growth
and Emerging Markets Equity 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 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.
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 GOLDMAN SACHS TRUST?
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
------------------------ ----------------------- ---------------------
------------
CORE LARGE CAP Long-term growth of At least 90% of total Russell 1000 Growth
GROWTH FUND capital through assets in equity Index
investment in a broadly securities of U.S.
diversified portfolio of issuers. The Fund's
large cap U.S. equity investments are
securities that are selected using both a
expected to have better variety of quantitative
prospects for earnings techniques and
growth than the general fundamental research in
domestic economy. seeking to maximize the
Dividend yield is a Fund's reward to risk
secondary consideration. ratio. The Fund's
portfolio is designed
to have risk, style,
capitalization and
industry
characteristics similar
to the Russell 1000
Growth Index.
- ----------------------------------------------------------------------------------------
CORE U.S. Long-term growth of At least 90% of total The S&P 500 Index
EQUITY FUND capital and dividend assets in equity
income through securities of U.S.
investment in a broadly issuers. The Fund's
diversified portfolio of investments are
predominantly large cap selected using both a
and blue chip equity variety of quantitative
securities representing techniques and
all major sectors of the fundamental research
U.S. economy. which seek 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 NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
------------ ------------------
------------------
------------------
- --------------------------------------------------------------------------------------------
GROWTH AND Long-term growth of At least 65% of total The S&P 500 Index
INCOME FUND capital and growth of assets in equity
income. securities that the
Investment Adviser
considers to have
favorable prospects for
capital appreciation
and/or dividend paying
ability.
- --------------------------------------------------------------------------------------------
GROWTH FUND Long-term capital At least 90% of total The S&P 500 Index
growth. assets in a focused
portfolio of equity
securities (including
convertible
securities). The
Investment Adviser
considers long-term
capital appreciation
potential in selecting
investments.
- --------------------------------------------------------------------------------------------
MID CAP EQUITY Long-term capital At least 65% of total The Russell Midcap Index
FUND appreciation. assets 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 The FT-Actuaries Europe
EQUITY FUND appreciation. at least 65%, of total and Pacific Index
assets in equity (unhedged)
securities of companies
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.
- --------------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and The (MSCI) Morgan
FUND appreciation. at least 65%, of total Stanley Capital
assets in equity International AC Asia
securities of companies Free ex Japan Index
in China, Hong (unhedged)
Kong, India, Indonesia,
Malaysia, Pakistan, the
Philippines,
Singapore, South Korea,
Sri Lanka, Taiwan and
Thailand. The Fund may
employ certain currency
management techniques.
- --------------------------------------------------------------------------------------------
EMERGING Long-term capital Substantially all, and The Morgan Stanley
MARKETS EQUITY appreciation. at least 65%, of total Capital International
FUND assets in equity Emerging Markets Free
securities of emerging Index
country issuers.
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 to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a
Fund may be exposed to a higher degree of risk and price volatility because
such securities may lack sufficient market liquidity to enable the 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 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, Asia Growth and Emerging Markets Equity
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 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.
5
<PAGE>
WHO MANAGES THE FUNDS?
Goldman Sachs Asset Management serves as Investment Adviser to the CORE
Large Cap Growth, Growth and Income, Growth and Mid Cap Equity Funds.
Goldman Sachs Funds Management, L.P. serves as Investment Adviser to the
CORE U.S. Equity Fund. Goldman Sachs Asset Management International serves
as Investment Adviser to the International Equity, Asia Growth and Emerging
Markets Equity Funds. As of April , 1997, the Investment Advisers,
together with their 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 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.
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>
CORE Large Cap Growth................. Annually Annually
CORE U.S. Equity...................... Annually Annually
Growth and Income..................... Quarterly Annually
Growth................................ Annually Annually
Mid Cap Equity........................ Annually Annually
International Equity.................. Annually Annually
Asia Growth........................... Annually Annually
Emerging Markets Equity............... Annually 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 or the
corresponding class of any portfolio of a Goldman Sachs Money Market Fund.
For further information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES
(INSTITUTIONAL SHARES)*
<TABLE>
<CAPTION>
CORE
LARGE GROWTH MID EMERGING
CAP CORE U.S. AND CAP INT'L ASIA MARKETS
GROWTH EQUITY INCOME GROWTH EQUITY EQUITY GROWTH EQUITY
FUND FUND FUND FUND FUND FUND FUND FUND
------ --------- ------ ------ ------ ------ ------ --------
<S> <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
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
limitations)**........ 0.60% 0.59% 0.70% 0.75% 0.75% 0.86% 0.86% 1.10%
Distribution (Rule 12b-
1) Fees............... None None None None None None None None
Other Expenses (after
expense limitation)**. 0.05% 0.06% 0.15% 0.10% 0.10% 0.24% 0.24% 0.20%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER
EXPENSE
LIMITATION)**......... 0.65% 0.65% 0.85% 0.85% 0.85% 1.10% 1.10% 1.30%
==== ==== ==== ==== ==== ==== ==== ====
</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:
CORE Large-Cap Growth......................... $ 7 $21 N/A N/A
CORE U.S. Equity Fund......................... $ $ $ $
Growth and Income Fund........................ $ $ $ $
Growth Fund................................... $ 9 $27 N/A N/A
Mid Cap Equity Fund........................... $ $
International Equity Fund..................... $ $ $ $
Asia Growth Fund.............................. $ $ $ $
Emerging Markets Equity Fund.................. $13 $41 N/A N/A
</TABLE>
- ---------------------
* 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 and Class B
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 and
Class B 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.
** Based on estimated amounts for the current fiscal year.
The purpose of the foregoing table is to assist investors in understanding
the various fees and expenses of a Fund that an investor in the Funds will
bear directly or indirectly. The costs and expenses included in the table and
hypothetical example above are based on estimated fees and expenses for the
current fiscal year 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."
7
<PAGE>
The table below states the management fees which the Investment Advisers have
voluntarily agreed to limit and what the management fees would be without
such limitations (as a percentage of average daily net assets):
<TABLE>
<CAPTION>
MANAGEMENT MANAGEMENT
FEE WITH FEE WITHOUT
LIMITATIONS LIMITATIONS
----------- -----------
<S> <C> <C>
CORE U.S. Equity.....................................
International Equity.................................
Asia Growth..........................................
Emerging Markets Equity..............................
</TABLE>
The Investment Advisers have also voluntarily agreed to reduce or limit
certain "Other Expenses" of the Funds (excluding transfer agency fees
estimated to be 0.04% of average daily net assets (applicable to the Growth
and Income and Mid-Cap Equity Funds only), management fees and fees under
service, distribution and authorized dealer service plans, taxes, interest
and brokerage and litigation, indemnification and other extraordinary
expenses) of the following average daily net assets:
<TABLE>
<CAPTION>
OTHER
EXPENSES
--------
<S> <C>
CORE Large-Cap Growth............................................ %
CORE U.S. Equity................................................. %
Growth and Income................................................ %
Growth........................................................... %
Mid Cap Equity................................................... %
International Equity............................................. %
Asia Growth...................................................... %
Emerging Market Equity........................................... %
</TABLE>
The Investment Advisers have no current intention of modifying or
discontinuing such limitations but may do so in the future at their
discretion. With regard to the CORE U.S. Equity, International Equity, Asia
Growth and Emerging Markets Equity Funds, Goldman Sachs does not impose
transfer agency fees pursuant to its contract with the Funds. If the
Investment Advisers and Goldman Sachs did not agree to limit certain "Other
Expenses" of each Fund and to limit the fees of the CORE U.S. Equity,
International Equity, Asia Growth and Emerging Markets Equity Funds as
described above, the "Other Expenses" and "Total Operating Expenses" of the
Institutional Shares of the Funds would be as follows:
<TABLE>
<CAPTION>
TOTAL
OTHER OPERATING
EXPENSES EXPENSES
-------- ---------
<S> <C> <C>
CORE Large-Cap Growth.................................. % %
CORE U.S. Equity....................................... % %
Growth and Income...................................... % %
Growth................................................. % %
Mid Cap Equity......................................... % %
International Equity................................... % %
Asia Growth............................................ % %
Emerging Market Equity................................. % %
</TABLE>
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
, 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, Growth and Emerging Markets Equity Funds. Accordingly, there are
no financial highlights for these Funds.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------- -------------------------------------
NET REALIZED FROM NET
AND UNREALIZED TOTAL REALIZED
NET ASSET GAIN (LOSS) ON INCOME GAIN ON TOTAL
VALUE, NET INVESTMENTS, (LOSS) FROM FROM NET INVESTMENT DISTRIBUTIONS
BEGINNING INVESTMENT OPTIONS AND INVESTMENT INVESTMENT AND FUTURES TO
OF PERIOD INCOME FUTURES OPERATIONS INCOME TRANSACTIONS SHAREHOLDERS
--------- ---------- -------------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
RATIOS ASSUMING
VOLUNTARY WAIVERTOTAL
DISTRIBOF FEES ORUTIONS
EXPENSE LIMITATIONS
------------------------------
NET RATIO OF NET RATIO OF
INCREASE RATIO OF NET ASSETS NET
(DECREASE) NET ASSET NET INVESTMENT AT END RATIO OF INVESTMENT
IN NET VALUE, EXPENSES INCOME PORTFOLIO OF EXPENSES INCOME
ASSET END OF TOTAL TO AVERAGE TO AVERAGE TURNOVER PERIOD TO AVERAGE TO AVERAGE
VALUE PERIOD RETURN(A) NET ASSETS NET ASSETS RATE (IN 000'S) NET ASSETS NET ASSETS
---------- --------- --------- ---------- ---------- --------- ---------- ---------- ----------
SELECT EQUITY FUND
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM DISTRIBUTIONS TO
INVESTMENT OPERATIONS SHAREHOLDERS
------------------------------------ ----------------------------------------------------
FROM NET
<CAPTION> NET REALIZED TOTAL REALIZED
NET ASSET AND UNREALIZED INCOME GAIN ON IN EXCESS NET
VALUE, NET GAIN ON FROM FROM NET INVESTMENT OF NET TOTAL ADDITIONAL INCREASE
BEGINNING INVESTMENT INVESTMENTS INVESTMENT INVESTMENT AND OPTION INVESTMENT DISTRIBUTIONS TO PAID-IN IN NET
OF PERIOD INCOME AND OPTIONS OPERATIONS INCOME TRANSACTIONS INCOME SHAREHOLDERS CAPITAL ASSET VALUE
--------- ---------- -------------- ---------- ---------- ------------ ---------- ----------------- ---------- -----------
GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MID-CAP EQUITY FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIO OF
NET
RATIO OF RATIO OF NET NET INVESTMENT
NET ASSET NET INVESTMENT ASSETS AT RATIO OF INCOME
VALUE, EXPENSES TO INCOME TO PORTFOLIO END OF EXPENSES (LOSS)
END OF TOTAL AVERAGE NET AVERAGE NET TURNOVER PERIOD TO AVERAGE TO AVERAGE
PERIOD RETURN(A) ASSETS ASSETS RATE (IN 000S) NET ASSETS NET ASSETS
--------- --------- ----------- ------------ --------- --------- ----------- -----------
GROWTH AND INCOME FUND
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MID-CAP EQUITY FUND
- ---------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
INCOME (LOSS) FROM INVESTMENT OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS
----------------------------------------------- ------------------------------------------------
NET REALIZED NET REALIZED
AND AND FROM NET
UNREALIZED UNREALIZED TOTAL REALIZED NET
GAIN (LOSS) GAIN (LOSS) INCOME GAIN ON INCREASE NET
NET ASSET NET ON ON FOREIGN (LOSS) IN EXCESS INVESTMENT, TOTAL (DECREASE) ASSET
VALUE, INVESTMENT INVESTMENTS, CURRENCY FROM FROM NET OF NET OPTION AND DISTRIBUTIONS IN NET VALUE,
BEGINNING INCOME OPTIONS AND RELATED INVESTMENT INVESTMENT INVESTMENT FUTURES TO ASSET END OF
OF PERIOD (LOSS) FUTURES TRANSACTIONS OPERATIONS INCOME INCOME TRANSACTIONS SHAREHOLDERS VALUE PERIOD
--------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------- ---------- ------
INTERNATIONAL EQUITY FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASIA GROWTH FUND
- ---------------------------------------------------------------------------------------------------------------------------------
<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
TOTAL NET AVERAGE TURNOVER (IN NET AVERAGE
RETURN(A) ASSETS NET ASSETS RATE 000S) ASSETS NET ASSETS
- --------- -------- ---------- --------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL EQUITY FUND
- ------------------------------------------------------------------
ASIA GROWTH FUND
- ------------------------------------------------------------------
</TABLE>
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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 of companies ("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 a macro analysis of
numerous economic and valuation variables to determine and 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 believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
Value Style Funds. The Goldman Sachs Growth and Income and Mid Cap Equity
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 market 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 Goldman Sachs Growth, International Equity, Asia
Growth and Emerging Markets Equity 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 Advisers will select
securities of growth companies trading in the Investment Advisers' 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 Advisers will ordinarily look 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.
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Quantitative Style Funds. The CORE Large Cap Growth and CORE U.S. Equity
Funds are managed using both quantitative and fundamental techniques. CORE is
an acronym for "Computer-Optimized, Research-Enhanced," which encapsulates the
Fund's investment process. Equity securities are evaluated using both a
proprietary quantitative multifactor model and the investment opinions of
Goldman Sachs' research analysts. The Investment Adviser then uses
computerized optimization techniques to construct diversified portfolios
consisting of stock that are highly rated both by the Investment Adviser's
proprietary multifactor model and by Goldman Sachs' research analysts. The
optimizer seeks to balance expected returns against portfolio risk in an
effort to find the portfolio with the optimal risk to reward trade-off
relative to the Fund's investment objectives.
CORE LARGE CAP GROWTH
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital through investment in a broadly diversified
portfolio of large cap U.S. equity securities that are expected to have better
prospects for earnings growth than the general domestic economy. Dividend
yield 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 seeks to achieve its investment objective by
investing in a portfolio of equity securities 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 may invest only in those fixed income securities that
are considered cash equivalents.
Investment Process. The Investment Adviser begins with a universe consisting
primarily of blue chip and other large capitalization equity securities. The
Investment Adviser uses a proprietary multifactor model (the "Multifactor
Model") to assign each equity security a rating, and, if the security is
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 selecting securities for the Fund, the Investment
Adviser utilizes optimization models to evaluate the ratings assigned by the
Multifactor Model and the Research Department to build a diversified
portfolio. This portfolio is primarily comprised of securities rated highest
by the Investment Adviser's Multifactor Model and research analysts and has
risk characteristics and industry weightings similar to those of the Russell
1000 Growth Index. Companies in which the Fund will invest are intended to
have above-average capitalization, volatility and earnings growth expectations
and below-average dividend yields. Under normal conditions, the securities of
any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated 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, 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
13
<PAGE>
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, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." The ratings reflect the analysts final judgement as to the
investment results of a specific security and incorporates the 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., the
analyst's ratings) method of selecting securities, the Fund seeks to
capitalize on the strengths of each discipline.
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 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.
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 seeks to achieve its
investment objective by investing in a portfolio of equity securities 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 those of the S&P 500 Index. The Fund will seek to have broad
representation in most major sectors of the U.S. economy and be comprised of
companies with above average capitalizations, average growth prospects, and
average dividend yields. The Fund may invest only in those fixed income
securities that are considered cash equivalents.
For a description of the investment process of the Fund, see "Investment
Process," "Investment Process," "Multifactor Model" and "Research Department"
under "CORE LARGE CAP GROWTH FUND."
GROWTH AND INCOME FUND
Objectives. The Growth and Income 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 countries with emerging markets and economies and securities quoted in
foreign currencies.
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<PAGE>
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 (including convertible
securities). The Fund seeks to achieve its investment objective by investing
primarily in a focused portfolio of equity securities that are considered by
the Investment Adviser to have long-term capital appreciation potential.
Although the Fund is a diversified fund, the Investment Adviser expects to
concentrate the Fund's investments in a focused number of issuers.
Other. Up to 10% of the Fund's total assets may be invested in foreign
securities, including securities of issuers in countries with emerging markets
and economies and securities quoted in foreign currencies.
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, Mid Cap Equity 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
countries with emerging markets and economies.
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 companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. 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.
15
<PAGE>
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." Up to 35% of the
Fund's total assets may be invested in fixed income securities.
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
Countries," which are not present in investments in more developed 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 up to 35% of its total assets in
equity securities of issuers in other countries, including Japan, and in fixed
income securities.
16
<PAGE>
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
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, Korea, Malaysia, Mexico, Morocco, Pakistan,
Peru, the Philippines, Poland, Portugal, Russia, Singapore, South Africa, Sri
Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. At the Investment
Adviser's discretion, the Fund may invest in other Emerging Countries.
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
Countries," 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 enhance total 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.
dollar-denominated securities of U.S. issuers. 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. The Investment Adviser used the value
based approach discussed above in selecting particular industries and 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.
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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
securities in which the CORE Large Cap Growth and CORE U.S. 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. 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. 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 taxes on dividend or interest payments, limitations on the removal
of funds or other assets, political or social instability or diplomatic
developments which could affect investments in those countries.
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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 CORE Large Cap Growth and CORE U.S. 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 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 International
Equity, Asia Growth and Emerging Markets Equity 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 International Equity, Asia
Growth and Emerging Markets Equity 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 International Equity, Asia Growth and Emerging
Markets Equity 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 International Equity, Asia Growth and Emerging Markets Equity
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, as permitted by applicable law, 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,
19
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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 authorized for use by the
International Equity, Asia Growth and Emerging Markets Equity Funds, offer
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 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity, Asia Growth and Emerging Markets Equity
Funds may 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
Asia Growth or Emerging Markets Equity 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 International Equity, Asia Growth and
Emerging Markets Equity 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
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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 principal 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
Large Cap Growth and CORE U.S. 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 Large Cap Growth and
CORE U.S. 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.
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 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. Each Fund (other than CORE Large Cap Growth and CORE U.S.
Equity Funds, which only invest in debt instruments that are cash equivalents)
may invest in debt securities, except as noted below,
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rated at least investment grade at the time of investment. Investment grade
debt securities are securities rated BBB or higher by Standard & Poor's
Ratings Group ("Standard & Poor's") or Baa or higher by Moody's Investors
Service, Inc. ("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 Growth and Income, Growth, International Equity, Asia Growth and
Emerging Markets Equity Funds may invest up to 10%, 10%, 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 in the BBB or Baa category 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. 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. 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 Large Cap Growth and CORE U.S. Select Equity
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
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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.
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 International Equity, Asia Growth and
Emerging Markets Equity 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 International
Equity, Asia Growth and Emerging Markets Equity 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 Large Cap Growth and CORE U.S.
Equity Funds may enter into such transactions only with respect to the
S&P/BARRA Growth Index or S&P 500 Index, respectively. 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, as permitted by applicable law, 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
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options on futures, unanticipated changes in interest rates, securities prices
or currency exchange rates 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 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 3-day settlement period. A Fund is required
to hold and maintain in a segregated account with the Fund's custodian until 3
days prior to the settlement date, cash or liquid assets, as permitted by
applicable law, 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, swaps, 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 the specific restricted security,
that such restricted security is eligible for resale under Rule 144A under the
Securities Act of 1933, as amended ("1933 Act"), and, therefore, is liquid.
The Trustees has adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities. The Trustees, however, retains oversight focusing on factors such
as valuation, liquidity and availability of information and is 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 of
their repurchase obligation. The International Equity, Asia Growth and
Emerging Market Equity Funds may
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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 of the Trust
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. See "Investment Restrictions" in the Additional
Statement. 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 Large Cap Growth and CORE U.S. 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.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the CORE Large Cap Growth and CORE U.S. 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 (International Equity, Asia Growth and Emerging Market
Equity Funds only), (iii) other investment companies and (iv) unseasoned
companies. For more information see the Additional Statement.
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RISK FACTORS
RISK OF INVESTING IN SMALL TO MEDIUM CAPITALIZATION COMPANIES. Investing in
the securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small to medium 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, Asia Growth and Emerging Markets
Equity Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Growth and Income
and Mid Cap Equity Funds may each invest up to 15% and the Growth Fund may
invest up to 10% of their total assets in securities of issuers in countries
with emerging economies or securities markets. 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 computed based on the aggregate trading volume by or
holdings of a Fund, the Investment Adviser and its affiliates and their
respective clients and other service providers.
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
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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.
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 transactions in foreign currency, forward
foreign currency exchange contracts, options, futures contracts and certain
other 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. All investment
objectives and 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
the Fund remains an appropriate investment in light of their then current
financial positions and needs.
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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, Growth and
Emerging Markets Equity Funds) historical portfolio turnover ratio. It is
anticipated that the annual portfolio turnover rates of the CORE Large Cap
Growth, Growth and Emerging Markets Equity Funds will generally not exceed
70%, 30% 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.
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 CORE Large Cap Growth, Growth and Income,
Growth and Mid 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 Fund.
Goldman Sachs Funds Management, L.P. registered as an investment adviser in
1990. Goldman Sachs Asset Management International, 140 Fleet Street, London
EC4A 2BJ, England, an affiliate of Goldman Sachs, serves as the investment
adviser to the International Equity, Asia Growth and Emerging Markets Equity
Funds. Goldman Sachs Asset Management International is regulated by the
Investment Management Regulatory Organisation Limited and registered as an
investment adviser in 1991. As of April , 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
28
<PAGE>
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.
Under the Management Agreements, 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.
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 Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- -----------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager-- Since Mr. Anderson joined the
Vice President Growth and Income 1996 Investment Adviser in
1992. Prior to 1992, he
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
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.
- -----------------------------------------------------------------------------------------
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
was studying for a Ph.D.
in finance at the
University of Chicago.
- -----------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager-- Since Mr. Collins joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- -----------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was the Chief Investment
Officer of Liberty
Investment Management,
Inc., and its
predecessor firm.
- -----------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- -----------------------------------------------------------------------------------------
Ronald E. Gutfleish Senior Portfolio Manager-- Since Mr. Gutfleish joined the
Vice President Growth and Income 1993 Investment Adviser in
1993. Prior to 1993, he
was a principal of
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,
Mr. Jones was a senior
quantitative analyst in
the Research Department.
- -----------------------------------------------------------------------------------------
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.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Alice Lui Portfolio Manager-- Since Ms. Lui joined the
Vice President Asia Growth 1994 Investment Adviser in
1990. Prior to 1990, she
was a management
consultant with Andersen
Consulting in Hong Kong.
- --------------------------------------------------------------------------------------------
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
Securities International
and for a period at
Manufacturers Hanover
Bank in New York.
- --------------------------------------------------------------------------------------------
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 Bankers Trust Australia
Equity 1997 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.
- --------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- --------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the
Vice President Growth 1997 Investment Adviser in
1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- --------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
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.
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
FUND RATE* JANUARY 31, 1997*
---- ----------- -----------------
<S> <C> <C>
GSAM
CORE Large Cap Growth........................ % %
Growth and Income............................ 0.70% %
Growth....................................... % %
Mid Cap Equity............................... 1.00% %
GSFM
CORE U.S. Equity............................. 0.75% %
GSAMI
International Equity......................... 1.00% %
Asia Growth.................................. 1.00% %
Emerging Markets Equity......................
</TABLE>
- ---------------------
*With respect to the CORE U.S. Equity, Mid Cap Equity, International Equity
and Asia Growth Funds, Management Agreements combining both advisory and
administrative services were adopted effective April 30,
30
<PAGE>
1997. The contractual rate set forth in the table is the rate under the
Management Agreement and is identical to the aggregate advisory and
administration fee rate 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 differences, if any, between
the stated advisory fee and the actual advisory fees paid by the Funds reflects
the fact that the Advisers did not charge the full amount of the advisory 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 Adviser to the CORE Large Cap Growth, CORE U.S. Equity, Growth
and Income, Growth, International Equity, Asia Growth and Emerging Markets
Equity Funds has 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 in the case of CORE Large Cap Growth, CORE
U.S. Equity, Growth and Income, Growth, International Equity, Asia Growth and
Emerging Markets Equity Funds, transfer agency fees) to the extent such
expenses exceed %, %, %, % and % 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 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
"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 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 Large Cap Growth, CORE U.S. Equity, Growth, International Equity, Asia
Growth and Emerging Markets Equity Funds with respect to Institutional or
Service Shares. Goldman Sachs is entitled to receive a transfer agency fee from
the Growth and Income and Mid Cap Equity Funds equal to 0.04% of the average
daily net assets of the Institutional and Service Shares of such Funds.
31
<PAGE>
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.
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Growth and Income Fund may publish its 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 performance rankings and indices.
The Growth and Income 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 Growth and Income 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.
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.
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.
32
<PAGE>
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. The CORE Large Cap Growth, CORE U.S. Equity, Growth
and Income, Growth, International Equity, Asia Growth and Emerging Markets
Funds offer four classes of shares: Institutional Shares, Service Shares,
Class A Shares and Class B Shares. The Mid Cap Equity Fund offers two classes
of shares: Institutional Shares and Service Shares.
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 entitle their holders to one vote per share, are freely transferable
and have no preemptive, subscription or conversion rights.
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. The Trustees, however, 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, Growth 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, each 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, each 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.
33
<PAGE>
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
International Equity, Asia Growth and Emerging Markets Equity Funds are not
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 on which a
shareholder may recognize a gain or loss.
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 intangibles 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.
34
<PAGE>
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 (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
35
<PAGE>
REPORTS TO SHAREHOLDERS
Institutional Shareholders will receive an annual report containing audited
financial statements and a semi-annual report. Each Institutional Shareholder
will also be provided with a printed confirmation for each transaction in the
shareholder's account and an individual quarterly 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 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 (or portions
thereof) 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 (currently 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
36
<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 a check drawn on a foreign
bank or a third party check will not be accepted) 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 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 Company'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.
37
<PAGE>
The Funds and Goldman Sachs each reserves the right to reject or restrict any
specific purchase order (including exchanges) by a particular purchaser (or
group of related purchasers). This may occur, for example, when a purchaser's
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 the
Funds.
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
portfolio of a 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 3:00 p.m.
Chicago time). A shareholder should obtain and read the prospectus relating to
any other fund and its shares or units 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 portfolio of a 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."
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
38
<PAGE>
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 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.
---------------------
39
<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>
[LOGO] Goldman Sachs
GOLDMAN SACHS PORTFOLIOS -- ACCOUNT INFORMATION FORM
This Account Information Form Should be Forwarded Promptly to
Goldman, Sachs & Co. No Redemption Can be Made Prior to Its Receipt
Send to: Goldman Sachs Portfolios Master No. ________________
4900 Sears Tower Fund Use Only
Chicago, IL 60606 _
1-800-621-2550 Date: _____________________
<TABLE>
<S> <C>
[_] GOLDMAN SACHS -- MONEY MARKET FUND [_] GOLDMAN SACHS GLOBAL INCOME FUND
Fill in Portfolio(s):________________ [_] GOLDMAN SACHS CORE LARGE CAP
GROWTH FUND
[_] GS -- ADJUSTABLE RATE GOVERNMENT FUND [_] GOLDMAN SACHS CORE U.S. EQUITY
FUND
[_] GS -- SHORT-DURATION GOVERNMENT FUND [_] GOLDMAN SACHS GROWTH AND INCOME
FUND
[_] GS -- SHORT DURATION TAX-FREE FUND [_] GOLDMAN SACHS GROWTH FUND
[_] GS -- CORE FIXED INCOME FUND [_] GOLDMAN SACHS MID CAP EQUITY
FUND
[_] GS -- HIGH YIELD FUND [_] GOLDMAN SACHS INTERNATIONAL
EQUITY FUND
[_] OTHER [_] GOLDMAN SACHS ASIA GROWTH FUND
Class of Shares:_____________________ [_] GOLDMAN SACHS EMERGING MARKETS
EQUITY FUND
</TABLE>
A. ACCOUNT RECORD
- -------------------------------------------------------------------------------
- ------------------------------------- -------------------------------------
Name of Account Telephone Number
- ------------------------------------- U.S. Citizen or
Street or P.O. Box Resident? Yes [_] No [_]
- ------------------------------------- If no is checked, fill in country of
City State Zip tax residence:
- ------------------------------------- -------------------------------------
Attention
B. DIVIDENDS AND DISTRIBUTIONS -- Check appropriate box (see "Dividends" in
Prospectus)
- -------------------------------------------------------------------------------
Dividends (including net short-term capital gains) [_] Cash[_] Units/Shares
Net Long-Term Capital Gains Distributions [_] Cash[_] Units/Shares
Fill in Fund(s): ____________________
(If no box is checked, dividends and capital gains distributions will be
reinvested in the account.)
C. SOCIAL SECURITY NUMBER OR OTHER TAXPAYER IDENTIFICATION NUMBER
CERTIFICATION
- -------------------------------------------------------------------------------
Taxpayer Identification Number: ______________
Under penalties of perjury, I certify that (1) The number shown on this form
is my correct Taxpayer Identification Number (or I am waiting for a number to
be issued to me), and (2) I am not subject to backup withholding because I am
exempt from backup withholding or I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding. See the "Guidelines for
Certification of Taxpayer Identification Number on Account Information Form,"
contained in the Appendix to the accompanying Prospectus.
S I G N ------------------------------ ----------------------------------
Signature Name (print) and Title (if any)
HERE
------------------------------ ----------------------------------
Date
D. OPTIONAL TELEPHONE EXCHANGE (see "Exchange Privilege" in Prospectus)
- -------------------------------------------------------------------------------
[_] Goldman,Sachs & Co. is hereby authorized to accept and act upon telephone
instructions from the undersigned or any other person for the exchange of
shares/units of the Fund into any fund described in the accompanying
Prospectus. The undersigned understands and agrees that neither the
applicable Fund nor Goldman, Sachs & Co. will be liable for any loss,
expense, or cost arising out of any telephone request effected hereunder.
Continued on reverse side
<PAGE>
E. REDEMPTION PLANS -- check one box only (see "Redemption of Units/Shares" in
Prospectus)
- -------------------------------------------------------------------------------
[_] I authorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic or other
instructions WITHOUT SIGNATURE GUARANTEE, from any person for the redemption
of shares/units for the above account provided that the proceeds are
transmitted to the following bank account(s) only. I understand any changes
to the following information must be made in writing to GOLDMAN, SACHS &
CO., must contain the appropriate number of signatures listed below and all
signatures MUST BE SIGNATURE GUARANTEED. Absent its own gross negligence,
neither the applicable Fund nor GOLDMAN, SACHS & CO. shall be liable for
such redemptions or for payments made to any unauthorized account.
[_] I have furnished GOLDMAN, SACHS & CO., WITH A SIGNATURE GUARANTEE (See
section G). I authorize GOLDMAN, SACHS & CO. to honor telephone,
telegraphic, or other instructions from any person for the redemption of
shares/units for the above account provided that the proceeds are
transmitted to the following bank account(s) only. Any changes to the
following information must be made in writing to GOLDMAN, SACHS & CO., (but
without signature guarantee) and contain the appropriate number of
signatures listed below. Absent its own gross negligence, neither the
applicable Fund nor GOLDMAN, SACHS & CO. shall be liable for such
redemptions or for payments made to any unauthorized account.
Please complete the following bank account information and place a line
through the unused portion.
Additional instructions may be added on separate pages, if necessary
Number of Bank Account Destinations completed in Section E of this form: [_]
1) ___________________________________ 3) ___________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ------------------------------------
Street Address Street Address
------------------------------------ ------------------------------------
City State Zip City State Zip
------------------------------------ ------------------------------------
Account Name Account No. Account Name Account No.
2) ___________________________________ 4) __________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ------------------------------------
Street Address Street Address
------------------------------------ ------------------------------------
City State Zip City State Zip
------------------------------------ ------------------------------------
Account Name Account No., Account Name Account No.,
[_] By Mail
F. SIGNATURE AUTHORIZATION
- -------------------------------------------------------------------------------
By the execution of this Account Information Form, the undersigned represents
and warrants that it has full right, power and authority to make the
investment applied for pursuant to this application and is acting for itself
or in some fiduciary capacity in making such investment, and the individual(s)
signing on behalf of the undersigned represent and warrant that they are duly
authorized to sign this application and to purchase and redeem Fund
units/shares on behalf of the undersigned. THE UNDERSIGNED AFFIRMS THAT IT HAS
RECEIVED AND REVIEWED A CURRENT FUND PROSPECTUS.
The undersigned understands that non-money market funds do not maintain a
constant net asset value and further that a constant net asset value in money
market funds is not guaranteed. As a result, the undersigned may experience a
loss of principal on its investments.
Number of Signatures required to make changes to this form: [_]
S I G N
HERE
------------------------------ -------------------------------------
Signature Name (print) and Title (if any)
Date
-------------------------------------
------------------------------ Date
Signature
-------------------------------------
------------------------------ Date
Signature
G. SIGNATURE GUARANTEE
- -------------------------------------------------------------------------------
- ------------------------------------- Affix Guarantee Stamp Here
Signature Guaranteed By
- -------------------------------------
Authorized Signature
<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
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-621-2550
EQ1IS/6.5K/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS EQUITY
FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
INSTITUTIONAL SHARES
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 FEBRUARY 14, 1997
PROSPECTUS
GOLDMAN SACHS EQUITY FUNDS CLASS A AND B SHARES
May 1, 1997
GOLDMAN SACHS BALANCED FUND
Seeks long-term capital growth and current income through investments in eq-
uity and fixed income securities.
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
Seeks long-term growth of capital through investment in a broadly diversi-
fied portfolio of large cap U.S. equity securities that are expected to have
better prospects for earnings growth than the general domestic economy. Div-
idend yield is a secondary consideration.
GOLDMAN SACHS CORE U.S. EQUITY FUND
Seeks long-term growth of capital and dividend income through investment in
a broadly diversified portfolio of predominantly large cap and blue chip eq-
uity securities representing all major sectors of the U.S. economy.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and growth of income through investments
in equity securities that are considered to have favorable prospects for
capital appreciation and/or dividend paying ability.
GOLDMAN SACHS CAPITAL GROWTH FUND
Seeks long-term growth of capital through diversified investments in equity
securities of companies that are considered to have long-term capital appre-
ciation potential.
GOLDMAN SACHS GROWTH FUND
Seeks long-term growth of capital through a focused portfolio of investments
in equity securities of companies that are considered to have long-term
capital appreciation potential.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation through investments in equity securi-
ties of companies that are organized outside the U.S. or whose securities
are principally traded outside the U.S.
GOLDMAN SACHS SMALL CAP EQUITY FUND
Seeks long-term capital growth through investments in equity securities of
companies with public stock market capitalizations of $1 billion or less at
the time of investment.
GOLDMAN SACHS ASIA GROWTH FUND
Seeks long-term capital appreciation through investments in equity securi-
ties of companies related (in the manner described herein) to Asian coun-
tries.
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
Seeks long-term capital appreciation through investments in equity securi-
ties of emerging country issuers.
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, Growth and Income,
Growth 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, Asia Growth and Emerging Markets Equity
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.
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 AND AFRICAN
AND OTHER EMERGING COUNTRIES IN WHICH THE BALANCED, INTERNATIONAL EQUITY,
ASIA GROWTH AND EMERGING MARKETS EQUITY FUNDS INVEST 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 IS 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."
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.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Fund Highlights..................... 3
Fees and Expenses................... 7
Financial Highlights................ 11
Investment Objectives and Policies.. 12
Description of Securities........... 19
Investment Techniques............... 24
Risk Factors........................ 28
Investment Restrictions............. 30
Portfolio Turnover.................. 30
Management.......................... 30
Reports to Shareholders............. 36
How to Invest....................... 36
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Services Available to Shareholders.................................... 41
Distribution and Authorized Dealer Service Plans...................... 44
How to Sell Shares of the Funds....................................... 45
Dividends............................................................. 47
Net Asset Value....................................................... 47
Performance Information............................................... 48
Shares of the Trust................................................... 49
Taxation.............................................................. 49
Additional Information................................................ 51
Appendix ............................................................. A-1
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?
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 BENCHMARKS
------------- ------------------------ ---------------------- ------------------------
BALANCED FUND Long-term capital growth Between 45% and 65% of The Lehman Aggregate
and current income. total assets in equity Bond Index and the
securities and at least Standard & Poor's Index
25% in fixed income of 500 Common Stocks
senior securities. (the "S&P 500 Index")
- ---------------------------------------------------------------------------------------------
CORE LARGE CAP Long-term growth of At least 90% of total Russell 1000 Growth
GROWTH FUND capital assets in equity Index
through investment in a securities of U.S.
broadly diversified issuers. The Fund's
portfolio of large cap investments are
U.S. equity securities selected using both
that are expected to a variety of
have better prospects quantitative techniques
for eanings growth than and fundamental research
the in seeking to maximize
general domestic the Fund's reward to
economy. Dividend yield risk ratio. The Fund's
is a secondary portfolio is designed
consideration. to have risk, style,
capitalization and
industry characteristics
similar to the Russell
1000 Growth Index.
- ---------------------------------------------------------------------------------------------
CORE U.S. Long-term growth of At least 90% of total The S&P 500 Index
EQUITY FUND capital and dividend assets in equity
income through securities of U.S.
invesment in a broadly issuers. The Fund's
diversified portfolio of investments are
predominantly large selected using both a
cap and blue chip equity variety of quantitative
securities representing techniques and
all major sectors of fundamental research
the U.S. economy. which seek 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 NAME INVESTMENT OBJECTIVES INVESTMENT CRITERIA BENCHMARK
------------- ---------------------- ----------------------- ----------------------
GROWTH AND Long-term growth of At least 65% of total The S&P 500 Index
INCOME FUND capital and growth of assets in equity
income. securities that the
Investment Adviser
considers to have
favorable prospects for
capital appreciation
and/or dividend paying
ability.
- ------------------------------------------------------------------------------------------
CAPITAL GROWTH Long-term capital At least 90% of total The S&P 500 Index
FUND growth. assets in a diversified
portfolio of equity
securities (including
convertible securities).
The Investment Adviser
considers long-term
capital appreciation
potential in selecting
investments.
- --------------------------------------------------------------------------------------------
GROWTH FUND Long-term capital At least 90% of total The S&P 500 Index
growth. assets in a focused
portfolio of equity
securities (including
convertible securities).
The Investment Adviser
considers long-term
capital appreciation
potential in selecting
investments.
- --------------------------------------------------------------------------------------------
INTERNATIONAL Long-term capital Substantially all, and The FT/S&P Actuaries
EQUITY FUND appreciation. at least 65%, of total Europe & Pacific Index
assets in equity (unhedged)
securities of companies
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 The Russell 2000
EQUITY FUND growth. assets 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.
- --------------------------------------------------------------------------------------------
ASIA GROWTH Long-term capital Substantially all, and The Morgan Stanley
FUND appreciation. at least 65%, of total Capital International
assets in equity All Country Asia Free ex
securities of companies Japan Index
in China, Hong
Kong, India, Indonesia,
Malaysia, Pakistan, the
Philippines, Singapore,
South Korea, Sri Lanka,
Taiwan and Thailand.
The Fund may employ
certain currency
management techniques.
- --------------------------------------------------------------------------------------------
EMERGING Long-term capital Substantially all, and The Morgan Stanley
MARKETS EQUITY appreciation at least 65%, of total Capital International
FUND assets in equity Emerging Markets Free
securities of emerging Index
country issuers. 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 to Medium Capitalization Companies. To the
extent that a Fund invests in the securities and related financial
instruments of small to medium sized market capitalization companies, a Fund
may be exposed to a higher degree of risk and price volatility because such
securities may lack sufficient market liquidity to enable the 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 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, Asia Growth and Emerging Markets Equity 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 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, CORE Large Cap Growth, Growth and Income, Growth 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, Asia Growth and Emerging Markets Equity Funds. As of
April , 1997, the Investment Advisers, together with their 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 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........................... $ 250 $50
Automatic Investment Plan................................ $ 50 $50
</TABLE>
5
<PAGE>
For further information, see "How to Invest--How to Buy Shares of the
Funds" on page .
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 .
WHAT ARE MY PURCHASE ALTERNATIVES?
The Funds offer two classes of shares through this Prospectus which may be
purchased at the next determined net asset value ("NAV") plus a sales
charge, which, depending on the class of shares you choose for investment,
may be imposed either at the time of purchase (Class A shares) or on a
contingent deferred basis at the time of redemption (Class B shares). 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.
<TABLE>
<CAPTION>
MAXIMUM FRONT MAXIMUM CONTINGENT
ALL FUNDS END SALES CHARGE DEFERRED SALES CHARGE
--------- ---------------- ---------------------
<S> <C> <C>
Class A.................. 5.5% (See above)
Class B.................. N/A 5% declining to 0% after six years
</TABLE>
Over time, the deferred sales charge and distribution fees attributable to
Class B shares will exceed the initial sales charge and the distribution
fees attributable to Class A shares. See "How to Invest--Alternative
Purchase Arrangements" on page .
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 AND PAID DISTRIBUTIONS
---- --------------------------- -------------
<S> <C> <C>
Balanced............................ Quarterly Annually
CORE Large Cap Growth............... Annually Annually
CORE U.S. Equity.................... Annually Annually
Growth and Income................... Quarterly Annually
Capital Growth...................... Annually Annually
Growth.............................. Annually Annually
International Equity................ Annually Annually
Small Cap Equity.................... Annually Annually
Asia Growth......................... Annually Annually
Emerging Markets Equity............. Annually 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 Units of the Prime Obligations Portfolio,
if you hold Class B shares of a Fund (the "ILA Portfolios"). For further
information concerning dividends, see "Dividends."
6
<PAGE>
FEES AND EXPENSES
<TABLE>
<CAPTION>
GROWTH
CORE CORE U.S. AND
BALANCED LARGE CAP EQUITY INCOME
FUND GROWTH FUND FUND FUND
------------------ ------------------ ------------------ ------------------
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>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge
Imposed on Purchases.. 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none
Maximum Sales Charge
Imposed on Reinvested
Dividends............. none none none none none none none none
Maximum Deferred Sales
Charge................ none/1/ 5.0% none/1/ 5.0% none/1/ 5.0% none/1/ 5.0%
Redemption Fees/2/..... none none none none none none none none
Exchange Fees/2/....... none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees (after
applicable
limitations).......... 0.65% 0.65% 0.60% 0.60% 0.59%/6/ 0.59%/6/ 0.70% 0.70%
Distribution (Rule
12b-1) Fees (after
applicable
limitations).......... 0.00%/3/ 0.75% 0.00% 0.75% 0.21%/3/ 0.75% 0.00%/3/ 0.75%
Other Expenses:
Authorized Dealer
Service Fees.......... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses (after
applicable
limitations).......... 0.10%/4/ 0.10%/4/ 0.05% 0.05% 0.14%/6/ 0.14%/6/ 0.27%/6/ 0.27%/6/
---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE AND
EXPENSE LIMITATIONS)... 1.00%/5/ 1.75%/5/ 0.90% 1.65% 1.19%/6/ 1.73%/6/ 1.22%/6/ 1.97%/6/
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
CAPITAL
GROWTH
FUND
---------------------
CLASS A CLASS B
---------- ----------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge
Imposed on Purchases.. 5.5%/1/ none
Maximum Sales Charge
Imposed on Reinvested
Dividends............. none none
Maximum Deferred Sales
Charge................ none/1/ 5.0%
Redemption Fees/2/..... none none
Exchange Fees/2/....... none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees (after
applicable
limitations).......... 1.00% 1.00%
Distribution (Rule
12b-1) Fees (after
applicable
limitations).......... 0.00%/3/ 0.75%
Other Expenses:
Authorized Dealer
Service Fees.......... 0.25% 0.25%
Other Expenses (after
applicable
limitations).......... 0.14% 0.14%
---------- ----------
TOTAL FUND OPERATING
EXPENSES (AFTER FEE AND
EXPENSE LIMITATIONS)... 1.39%/5/ 2.14%/5/
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SMALL EMERGING
INT'L CAP ASIA MARKETS
GROWTH EQUITY EQUITY GROWTH EQUITY
FUND FUND FUND FUND FUND
------------------ ------------------ ------------------ ------------------ ------------------
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> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Charge
Imposed on Purchases.. 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none 5.5%/1/ none
Maximum Sales Charge
Imposed on Reinvested
Dividends............. none none none none none none none none none none
Maximum Deferred Sales
Charge................ none/1/ 5.0% none/1/ 5.0% none/1/ 5.0% none/1/ 5.0% none/1/ 5.0%
Redemption Fees/2/..... none none none none none none none none none none
Exchange Fees/2/....... none none none none none none none none none none
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
Management Fees (after
applicable
limitations).......... 0.75% 0.75% 0.86%/6/ 0.86%/6/ 1.00% 1.00% 0.86%/6/ 0.86%/6/ 1.10% 1.10%
Distribution (Rule
12b-1) Fees (after
applicable
limitations).......... 0.10% 0.75% 0.21%/3/ 0.75% 0.00%/3/ 0.75% 0.21%/3/ 0.75% 0.25% 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).......... 0.24% 0.24% 0.36%/6/ 0.36%/6/ 0.30% 0.30% 0.34%/6/ 0.34%/6/ 0.30% 0.30%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL FUND OPERATING
EXPENSES (AFTER FEE AND
EXPENSE LIMITATIONS)... 1.34% 1.99% 1.68%/6/ 2.22%/6/ 1.55%/5/ 2.30%/5/ 1.66%/6/ 2.20%/6/ 1.90% 2.40%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
7
<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>
Balanced Fund
Class A Shares................................ $ $ $ $
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
CORE Large Cap Growth Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
CORE U.S. Equity Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Growth and Income Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Capital Growth Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Growth Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
International Equity Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Small Cap Equity Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Asia Growth Fund
Class A Shares................................
Class B Shares
--Assuming complete redemption at end of peri-
od...........................................
--Assuming no redemption......................
Emerging Markets Equity Fund
Class A Shares................................ n/a n/a
Class B Shares
--Assuming complete redemption at end of peri-
od........................................... n/a n/a
--Assuming no redemption...................... n/a n/a
</TABLE>
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.
8
<PAGE>
- --------
/1As/a percentage of the offering price. No sales charge is imposed on
purchases of Class A shares by certain classes of investors. 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."
/2A/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."
/3Goldman/Sachs voluntarily has agreed to waive the entire distribution fee
attributable to Class A shares of the Balanced, Growth and Income, Capital
Growth and Small Cap Equity Funds. In addition, Goldman Sachs voluntarily
has agreed to waive a portion of the distribution fee attributable to Class
A shares of the CORE Large Cap Growth, CORE U.S. Equity, Growth,
International Equity and Asia Growth Funds. Goldman Sachs has no current
intention of modifying or discontinuing such limitations but may do so in
the future at its discretion. Without this waiver, the distribution fees
payable by these Funds would be 0.25% annually of average daily net assets
attributable to the Class A shares and the Funds' Total Operating Expenses
attributable to the Class A shares would be correspondingly higher.
/4The/Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the following Funds (excluding management, distribution
and authorized dealer service fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) and with the
exception of the Balanced and CORE Large Cap Growth Funds, transfer agency
fees. The Investment Adviser has no current intention of modifying or
discontinuing such limitation but may do so in the future at its discretion.
<TABLE>
<CAPTION>
OTHER TRANSFER AGENCY
EXPENSES FEES
-------- ---------------
<S> <C> <C>
Balanced......................................... % %
CORE Large Cap Growth............................ % %
CORE U.S. Equity................................. % %
Growth and Income................................ % %
Growth........................................... % %
Capital Growth................................... % %
International Equity............................. % %
Small Cap Equity................................. % %
Asia Growth...................................... % %
Emerging Markets Equity.......................... % %
</TABLE>
/5Based/on estimated amounts for the current fiscal year. The Investment
Advisers and GSAM have voluntarily agreed to limit their management fees to
the following, respectively (as a percentage of average daily net assets):
<TABLE>
<CAPTION>
MANAGEMENT FEES
---------------
<S> <C>
Balanced.................................................. %
CORE Large Cap Growth..................................... %
CORE U.S. Equity.......................................... %
Growth and Income......................................... %
Growth.................................................... %
Capital Growth............................................ %
International Equity...................................... %
Small Cap Equity.......................................... %
Asia Growth............................................... %
Emerging Markets Equity................................... %
</TABLE>
The Investment Advisers and GSAM have no current intention of modifying or
discontinuing any of such limitations but may do so in the future at their
discretion.
/6Based/on estimated amounts for the current fiscal year. If Goldman Sachs and
the Investment Advisers had not agreed to the limits described above, the
"Management Fees," "Distribution Fees," "Other Expenses" and "Total
Operating Expenses," respectively, of the following Funds would be (as a
percentage of average daily net assets) as follows:
9
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT DISTRIBUTION OTHER TOTAL OPERATING
FEES FEES EXPENSES EXPENSES
--------------- --------------- --------------- ---------------
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>
Balanced................ 0. % . % 0. % . % 0. % . % 0. % . %
CORE Large Cap Growth... 0. % . % 0. % . % 0. % . % 0. % . %
CORE U.S. Equity........ 0. % . % 0. % . % 0. % . % 0. % . %
Growth and Income....... 0. % . % 0. % . % 0. % . % 0. % . %
Growth.................. 0. % . % 0. % . % 0. % . % 0. % . %
Capital Growth.......... 0. % . % 0. % . % 0. % . % 0. % . %
International Equity.... 0. % . % 0. % . % 0. % . % 0. % . %
Small Cap Equity........ 0. % . % 0. % . % 0. % . % 0. % . %
Asia Growth............. 0. % . % 0. % . % 0. % . % 0. % . %
Emerging Markets Equity. 0. % . % 0. % . % 0. % . % 0. % . %
</TABLE>
See "Management--Investment Advisers" and "Distribution and Authorized Dealer
Service Plans."
The annual "Management Fees," "Distribution Fees," "Other Expenses" and
"Total Operating Expenses," respectively, incurred by the Class A shares and
Class B shares of these Funds during the fiscal year ended January 31, 1997
(expressed as a percentage of average daily net assets after fee adjustments)
were as follows:
<TABLE>
<CAPTION>
MANAGEMENT DISTRIBUTION OTHER TOTAL OPERATING
FEES FEES EXPENSES EXPENSES
--------------- --------------- --------------- ---------------
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>
Balanced................ 0. % . % 0. % . % 0. % . % 0. % . %
CORE Large Cap Growth... 0. % . % 0. % . % 0. % . % 0. % . %
CORE U.S. Equity........ 0. % . % 0. % . % 0. % . % 0. % . %
Growth and Income....... 0. % . % 0. % . % 0. % . % 0. % . %
Growth.................. 0. % . % 0. % . % 0. % . % 0. % . %
Capital Growth.......... 0. % . % 0. % . % 0. % . % 0. % . %
International Equity.... 0. % . % 0. % . % 0. % . % 0. % . %
Small Cap Equity........ 0. % . % 0. % . % 0. % . % 0. % . %
Asia Growth............. 0. % . % 0. % . % 0. % . % 0. % . %
Emerging Markets Equity. 0. % . % 0. % . % 0. % . % 0. % . %
</TABLE>
The information with respect to the Funds set forth in the foregoing table
and hypothetical example relates only to Class A and B shares. The CORE Large-
Cap Growth, CORE U.S. Equity, Growth and Income, Growth, International Equity,
Asia Growth and Emerging Markets Equity Funds, but not the other Funds, also
offer Institutional and Service Shares, which are subject to different fees
and expenses (which affect performance), have different minimum investment
requirements and are entitled to different services than Class A shares and
Class B shares. Information regarding Institutional and Service Shares may be
obtained from your sales representative or from Goldman Sachs by calling the
number on the back cover page 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.
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 estimated fees and expenses for the
current fiscal year 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 during the period(s) indicated has been audited by ,
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, Growth
and Emerging Markets Equity Funds. Accordingly, there are no financial
highlights for these Funds.
11
<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 of companies ("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 a macro analysis of
numerous economic and valuation variables to determine and 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 believe that the market price fully reflects or exceeds
the securities' fundamental valuation or when other more attractive
investments are identified.
Value Style Funds. The Goldman Sachs Growth and Income, 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
market 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 Goldman Sachs Capital Growth, Growth, International
Equity, Asia Growth and Emerging Markets Equity 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 Advisers will
select securities of growth companies trading in the Investment Advisers'
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 Advisers will ordinarily look 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.
12
<PAGE>
Quantitative Style Funds. The CORE Large Cap Growth and CORE U.S. Equity
Funds are managed using both quantitative and fundamental techniques. CORE is
an acronym for "Computer-Optimized, Research-Enhanced," which encapsulates the
Fund's investment process. Equity securities are evaluated using both a
proprietary quantitative multifactor model and the investment opinions of
Goldman Sachs' research analysts. The Investment Adviser then uses
computerized optimization techniques to construct diversified portfolios
consisting of stocks that are highly rated both by the Investment Adviser's
proprietary multifactor model and by Goldman Sachs' research analysts. The
optimizer seeks to balance expected returns against portfolio risk in an
effort to find the portfolio with the optimal risk to reward trade-off
relative to the Fund's investment objectives.
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.
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 equity securities, 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 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 countries with
emerging markets and economies 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 shall collectively be referred to herein as "fixed income
securities." The Fund's investments in fixed income securities that are issued
by foreign issuers, including issuers in countries with emerging markets 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. 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.
13
<PAGE>
CORE LARGE CAP GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
long-term growth of capital through investment in a broadly diversified
portfolio of large cap U.S. equity securities that are expected to have better
prospects for earnings growth than the general domestic economy. Dividend
yield 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 seeks to achieve its investment objective
by investing in a portfolio of equity securities 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 may invest only in those in fixed income securities
that are considered cash equivalents.
Investment Process. The Investment Adviser begins with a universe consisting
primarily of blue chip and other large capitalization equity securities. The
Investment Adviser uses a proprietary multifactor model (the "Multifactor
Model") to assign each equity security a rating, and, if the security is
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 selecting securities for the Fund, the Investment
Adviser utilizes optimization models to evaluate the ratings assigned by the
Multifactor Model and the Research Department to build a diversified
portfolio. This portfolio is primarily comprised of securities rated highest
by the Investment Adviser's Multifactor Model and research analysts and has
risk characteristics and industry weightings similar to those of the Russell
1000 Growth Index. Companies in which the Fund will invest are intended to
have above-average capitalization, volatility and earnings growth expectations
and below-average dividend yields. Under normal conditions, the securities of
any one issuer may not exceed 5% of the Fund's total assets.
Multifactor Model. The Multifactor Model is a sophisticated 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, 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, the Research Department uses a
four category rating system ranging from "recommended for purchase" to "likely
to underperform." The ratings reflect the analysts' final judgment as to the
investment results of a specific security and incorporates the 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., the
analyst's ratings) method of selecting securities, the Fund seeks to
capitalize on the strengths of each discipline.
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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 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.
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 seeks to achieve its
investment objective by investing in a portfolio of equity securities selected
using both a variety of quantitative techniques and fundamental research and
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 those of the S&P 500 Index. The Fund will seek to have broad
representation in most major sectors of the U.S. economy and be comprised of
companies with above average capitalizations, average growth prospects, and
average dividend yields. The Fund may invest only in those 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 "CORE LARGE CAP
GROWTH FUND."
GROWTH AND INCOME FUND
Objectives. The Growth and Income 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 countries with emerging markets and economies 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 (including convertible
securities). The Fund seeks to achieve its investment objective by investing
primarily in a diversified portfolio of equity securities that are considered
by the Investment Adviser to have long-term capital appreciation potential.
Other. Up to 10% of the Fund's total assets may be invested in foreign
securities, including securities of issuers in countries with emerging markets
and economies and securities quoted in foreign currencies.
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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 (including convertible
securities). The Fund seeks to achieve its investment objective by investing
primarily in a focused portfolio of equity securities that are considered by
the Investment Adviser to have long-term capital appreciation potential.
Although the Fund is a diversified fund, the Investment Adviser expects to
concentrate the Fund's investments in a focused number of issuers.
Other. Up to 10% of the Fund's total assets may be invested in foreign
securities, including securities of issuers in countries with emerging markets
and economies 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 companies located in the developed countries in Western
Europe and in Japan. However, the Fund may also invest in the securities of
issuers located in the following countries: Argentina, Australia, Bangladesh,
Brazil, Canada, Chile, China, Colombia, Czech Republic, Egypt, Hong Kong,
Hungary, India, Indonesia, Israel, Jamaica, Jordan, Kenya, Kuwait, Malaysia,
Mexico, Morocco, New Zealand, Nigeria, Pakistan, the Philippines, Poland, The
Republic of Slovakia, Singapore, South Korea, Sri Lanka, South Africa, Taiwan,
Thailand, Turkey, Venezuela and Zimbabwe. 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 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.
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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 countries with emerging markets and economies and securities quoted
in foreign currencies.
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
Countries," which are not present in investments in more developed 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
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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 up
to 35% of its total assets in equity securities of issuers in other countries,
including Japan, and in fixed income securities.
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, Korea, Malaysia, Mexico, Morocco, Pakistan,
Peru, the Philippines, Poland, Portugal, Russia, Singapore, South Africa, Sri
Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. At the Investment
Adviser's discretion, the Fund may invest in other Emerging Countries.
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
Countries," 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.
dollar-denominated securities of U.S. issuers. 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
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particular issuers. The Investment Adviser used the value based approach
discussed above in selecting particular industries and 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 Investments" 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.
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 Large Cap Growth and
CORE U.S. 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. 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. Commissions on transactions in foreign securities may be
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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 taxes on dividend or interest payments, 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 Large Cap Growth and CORE U.S. 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 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,
International Equity, Asia Growth and Emerging Markets Equity 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,
International Equity, Asia Growth and Emerging Markets Equity 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, International Equity,
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Asia Growth and Emerging Markets Equity 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, International Equity, Asia Growth
and Emerging Markets Equity 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, as permitted by applicable
law, 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 United States 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 authorized for use by the
Balanced, International Equity, Asia Growth and Emerging Markets Equity Funds,
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 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.
In addition to investing in securities denominated or quoted in a foreign
currency, the Balanced, International Equity, Asia Growth and Emerging Markets
Equity Funds may 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 Asia Growth or Emerging Markets Equity 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,
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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, International Equity, Asia
Growth and Emerging Markets Equity 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 principal 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
Large Cap Growth and CORE U.S. 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 Large Cap Growth and
CORE U.S. 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.
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.
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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 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. Each Fund (other than CORE Large Cap Growth and CORE U.S.
Equity Funds, which only invest in debt instruments that are cash equivalents)
may invest in debt securities, except as noted below, 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 in debt securities that
are rated BB or B by Standard & Poor's or Ba or B by Moody's or, if unrated by
such rating organizations, determined by the Investment Adviser to be of
comparable credit quality. The Growth and Income, Capital Growth, Growth,
Small Cap Equity, International Equity, Asia Growth and Emerging Markets
Equity Funds may invest up to 10%, 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. Fixed income securities
rated in the BBB or Baa category 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. 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. Fixed income securities
rated BB or Ba or below (or comparable unrated securities) are commonly
referred to as "junk bonds" and are considered predominantly 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
23
<PAGE>
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 dependent 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 Large Cap Growth and CORE U.S. Equity 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.
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, International Equity, Asia Growth
and Emerging Markets Equity 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, the Balanced,
International Equity, Asia Growth and Emerging Markets Equity Funds may
purchase call or put
24
<PAGE>
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 Large Cap Growth and CORE U.S.
Equity Funds may enter into such transactions only with respect to the
S&P/BARRA Growth Index or S&P 500 Index, respectively. 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, as permitted by applicable law, 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 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 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
25
<PAGE>
price at a future date beyond the customary 3-day settlement period. A Fund is
required to hold and maintain in a segregated account with the Fund's
custodian until 3 days prior to the settlement date, cash or liquid assets, as
permitted by applicable law, 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, 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, as amended ("1933 Act"), and, therefore, is liquid.
The Trustees has adopted guidelines and delegated to the Investment Adviser
the daily function of determining and monitoring the liquidity of portfolio
securities. The Trustees, however, retains oversight focusing on factors such
as valuation, liquidity and availability of information and is 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 of
their repurchase obligation. The Balanced, International Equity, Asia Growth
and Emerging Markets Equity 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 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
26
<PAGE>
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. See "Investment
Restrictions" in the Additional Statement. 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.
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) 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 may benefit from 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 assets, as permitted by applicable
law, in an amount equal to the forward purchase price. The benefits derived
from the use of mortgage dollar rolls depend upon the Investment Adviser's
ability to manage 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.
SHORT SALES AGAINST-THE-BOX
Each Fund (other than the CORE Large Cap Growth and CORE U.S. 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.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its total
assets (except that the CORE Large Cap Growth, CORE U.S. Equity and Emerging
Market 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, International Equity, Asia Growth and Emerging
Markets Equity 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 and (vi) unseasoned companies. For more information see
the Additional Statement.
27
<PAGE>
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, Asia Growth and Emerging Markets
Equity Funds may each invest without limit in the securities of issuers in
countries with emerging economies or securities markets. The Balanced, Growth
and Income and Small Cap Equity Funds may each invest up to 15% and the
Capital Growth and Growth Funds may each invest up to 10% of their total
assets in securities of issuers in countries with emerging economies or
securities markets. 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 computed
based on the aggregate trading volume by or holdings of a Fund, the Investment
Adviser and 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
28
<PAGE>
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 US 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.
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 transactions in foreign currency, forward
foreign currency exchange contracts, options, futures contracts and certain
other 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.
29
<PAGE>
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. All investment
objectives and 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
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 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, Growth and
Emerging Markets Equity Funds) historical portfolio turnover ratio. It is
anticipated that the annual portfolio turnover rates, of the CORE Large Cap
Growth, Growth and Emerging Markets Equity Funds will generally not exceed
70%, 30% 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.
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 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,
Growth and Income, Growth 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, 140 Fleet Street, London EC4A 2BJ, England, an affiliate of
Goldman Sachs, serves as the investment adviser to the International Equity,
Asia Growth and Emerging Markets Equity Funds. Goldman Sachs Asset Management
30
<PAGE>
International became a member of the Investment Management Regulatory
Organisation Limited in 1990 and registered as an investment adviser in 1991.
As of April , 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, 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.
Under the Management Agreements, 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.
31
<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-- Growth Since Mr. Adler joined the
Vice President Capital Growth 1997 Investment Adviser in
1997 1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- -----------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager-- Since Mr. Anderson joined the
Vice President Growth and Income 1996 Investment Adviser in
Balanced (Equity) 1996 1992. Prior to 1992, he
was a research analyst
in the Investment
Research Department of
Goldman, Sachs & Co.
- -----------------------------------------------------------------------------------------
Eileen A. Aptman Portfolio Manager-- Since Ms. Aptman joined the
Vice President Growth and Income 1996 Investment Adviser in
Balanced (Equity) 1996 1993. Prior to 1993, she
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 Balanced (Fixed Income) 1994 Investment Adviser in
Co-Head U.S. 1990.
- -----------------------------------------------------------------------------------------
Fixed Income
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
was studying for a Ph.D.
in finance at the
University of Chicago.
- ----------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager-- Since Mr. Collins joined the
Vice President Growth 1997 Investment Adviser in
Capital Growth 1997 1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc., and
its predecessor firm.
- ----------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager-- Since Mr. Ehlers joined the
Managing Director Growth 1997 Investment Adviser in
Capital Growth 1997 1997. Prior to 1997, he
was the Chief Investment
Officer of Liberty
Investment Management,
Inc. and its predecessor
firm.
- ----------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager-- Since Mr. Ekizian joined the
Vice President Growth 1997 Investment Adviser in
Capital Growth 1997 1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- ----------------------------------------------------------------------------------------
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 Balanced (Equity) 1994 Investment Adviser in
Growth and Income 1993 1993. Prior to 1993, he
was a principal of
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,
Mr. Jones was a senior
quantitative analyst in
the Research Department.
- -----------------------------------------------------------------------------------------
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.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
YEARS
PRIMARILY
NAME AND TITLE FUND RESPONSIBILITY RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
-------------- ------------------- ----------- ----------------------------
<C> <C> <C> <S>
Alice Lui Portfolio Manager-- Since Ms. Lui joined the
Vice President Asia Growth 1994 Investment Adviser in
1990. Prior to 1990, she
was a management
consultant with Andersen
Consulting in Hong Kong.
- -----------------------------------------------------------------------------------------------
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
Securities International
and for a period at
Manufacturers Hanover
Bank in New York.
- -----------------------------------------------------------------------------------------------
Matthew B. McLennan Assistant Portfolio Manager-- Since Mr. McLennan joined the
Associate Small Cap Equity 1996 Investment Adviser in
1994. Prior to 1994, 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 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.
- -----------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager-- Since Mr. Shell joined the
Vice President Growth 1997 Investment Adviser in
Capital Growth 1997 1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- -----------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager-- Since Mr. Segundo joined the
Vice President Growth 1997 Investment Adviser in
Capital Growth 1997 1997. Prior to 1997, he
was a portfolio manager
at Liberty Investment
Management, Inc. and its
predecessor firm.
- -----------------------------------------------------------------------------------------------
Karma Wilson Portfolio Manager-- Since Ms. Wilson joined the
Vice President Asia Growth 1995 Investment Adviser in
1995. Prior to 1995, she
was an investment
analyst with Bankers
Trust Australia Ltd. and
prior to 1993 worked at
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.
33
<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
FUND RATE* JANUARY 31, 1997*
---- ----------- -----------------
<S> <C> <C>
GSAM
Balanced..................................... 0.65% %
CORE Large Cap Growth........................ % %
Growth and Income............................ 0.70% %
Growth....................................... % %
Small Cap Equity............................. 1.00% %
GSFM
CORE U.S. Equity............................. 0.75% %
Capital Growth............................... 1.00%
GSAMI
International Equity......................... 1.00% %
Asia Growth.................................. 1.00% %
Emerging Markets Equity......................
</TABLE>
- --------
*With respect to the Balanced, CORE U.S. Equity, Capital Growth, International
Equity, Small Cap Equity and Asia Growth Funds, Management Agreements
combining both advisory and administrative services were adopted effective
April 30, 1997. The contractual rate set forth in the table is the rate under
the Management Agreements and is identical to the aggregate advisory and
administration fee rate 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 advisory fee and the actual advisory fees paid by
the Funds reflects the fact that the Advisers did not charge the full amount
of the advisory 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 Adviser to the Balanced, CORE Large Cap Growth, CORE U.S.
Equity, Growth and Income, Growth, International Equity, Asia Growth and
Emerging Markets Equity Funds has voluntarily agreed to reduce or limit
certain "Other Expenses" of such Funds (excluding management, distribution,
authorized dealer service and service fees, taxes, interest and brokerage fees
and litigation, indemnification and other extraordinary expenses, and in the
case of CORE Large Cap Growth, CORE U.S. Equity, Growth and Income, Growth,
International Equity, Asia Growth and Emerging Markets Equity Funds, transfer
agency fees) to the extent such expenses exceed %, %, %, %, %, %
and % 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 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
34
<PAGE>
inquiries. The amount of such compensation may be up to 0.125% annually of the
average daily net assets of the Balanced, CORE U.S. Equity and CORE Large Cap
Growth Funds, 0.1375% annually of the average daily net assets of the Growth
and Income Fund and 0.1875% annually of the average daily net assets of the
Capital Growth, Growth, Small Cap Equity, International Equity, Asia Growth
and Emerging Markets Equity Funds attributable to shares held by customers of
such Authorized Dealers. In addition, Goldman Sachs may from time to time, at
its own expense, provide compensation to certain Authorized Dealers who
perform administrative services with respect to depository institutions whose
customers purchase shares of a Fund. These services 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 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. The amount of such compensation may be up to 0.08% annually of
the average net assets of a Fund's shares attributable to purchases through,
and held by the customers of, such depository institutions. Such compensation
does not represent an additional expense to a Fund or its shareholders, since
it will be paid from the assets of Goldman Sachs or its affiliates.
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 and Funds 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 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, 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
each Fund by Goldman Sachs (as Transfer Agent) and the assumption by Goldman
Sachs of
35
<PAGE>
the expenses related thereto, Goldman Sachs is entitled to receive a fee from
each Fund, with respect to Class A shares and Class B 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
agents). 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.
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 and Class B
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 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. Class A shares are subject to distribution fees of up
to 0.25% (which currently are being waived in the case of Balanced, Growth and
Income, Capital Growth and Small Cap Equity Funds and are limited to 0.21% for
the CORE Large Cap Growth, CORE U.S. Equity, Growth, International Equity,
Asia Growth and Emerging Markets Equity Funds) and authorized dealer service
fees of up to 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 5% if
redeemed within six years of purchase. Class B shares are subject to
distribution and authorized dealer service fees of up to 0.75% and 0.25%,
respectively, of each 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.
36
<PAGE>
FACTORS TO CONSIDER IN CHOOSING CLASS A OR CLASS B 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 $50,000 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, you might consider purchasing
Class B shares. There is a maximum purchase limitation of $250,000 in the
aggregate on purchases of Class B shares.
HOW TO BUY SHARES OF THE FUNDS--CLASS A AND CLASS B 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.
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. For purchases through the Automatic Investment Plan, the
minimum initial investment is $50. The minimum subsequent investment is $50.
These requirements may be waived at the discretion of the Trust officers.
You may pay for purchases of shares by check (except that a check drawn on a
foreign bank or we reserve the right not to accept 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 Equity 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 Fund 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.
37
<PAGE>
OFFERING PRICE--CLASS A SHARES
The offering price of Class A shares of each 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 $50,000.............................. 5.50% 5.82% 5.00%
$50,000 up to (but less than) $100,000......... 4.75 4.99 4.00
$100,000 up to (but less than) $250,000........ 3.75 3.90 3.00
$250,000 up to (but less than) $500,000........ 2.75 2.83 2.25
$500,000 up to (but less than) $1 million...... 2.00 2.04 1.75
$1 million or more............................. 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 assets, 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.
Purchases of $1 million or more of Class A shares 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 (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 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
38
<PAGE>
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 (i) buy shares costing $500,000 or
more, or (ii) have at the time of purchase, 100 or more eligible participants,
or (iii) certify that they project to have annual plan purchases of $200,000
or more, or (iv) are provided administrative services by a third party
administrator that in the aggregate satisfies (i) or (iii) 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 (1) paid an initial
sales charge or (2) 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 Portfolios 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.
A reinvesting shareholder may realize a gain or loss for federal tax
purposes 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
shareholder reinvesting at net asset value pursuant to the reinvestment
privilege for purposes of determining gain or loss realized on the redemption,
but
39
<PAGE>
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 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 $50,000 or more. 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 $50,000 or more 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 the Funds 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 rates shown in the table that follows. 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 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
YEAR SINCE DOLLAR AMOUNT
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>
40
<PAGE>
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 4.00% 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.
WAIVER OR REDUCTION OF CONTINGENT DEFERRED SALES CHARGE. The CDSC on Class B
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 and Class B 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 your Class
B 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 Portfolio or ILA Fund. 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 Portfolio or ILA Fund. Shares acquired through
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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 made must equal or
exceed $10,000 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 offer their shares for purchase by retirement plans, including IRA
Plans for individuals and their non-employed spouses and defined contribution
plans such as 401(k) Salary Reduction Plans. 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 information sets forth the service fee
charged for retirement plans and describes the federal income tax consequences
of establishing a plan. Under all plans, dividends and distributions will be
automatically reinvested in additional shares of the same class of the Fund
or, if so directed by the shareholder, in cash or in shares of the same class
or an equivalent class of any other Goldman Sachs Fund or ILA Portfolio.
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 or units 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 or units 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.
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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 Equity
Funds, Shareholder Services, c/o NFDS, P.O. Box 419711, Kansas City, MO 64141-
6711 or, if previously elected in the Fund's Account Application, by telephone
at 800-526-7384 (8:00 a.m. to 3:00 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 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 request is in writing and is 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 sale of the shares surrendered in the exchange, on
which an investor may realize a gain or loss, followed by a purchase of shares
or units received in the exchange. If such sale occurs within ninety (90) days
after the purchase of such shares, to the extent a sales charge that would
otherwise apply to the shares or units 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 realized on such sale for federal income tax purposes, but
instead will be added to the tax basis of the shares or units 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
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. Authorized Dealers who receive a portion of the sales charge
applicable to the purchase of Class A or Class B shares will not be permitted
to impose any other fees on the shareholders in connection with the purchase
of such shares.
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). The Funds or Goldman
Sachs may reject or restrict purchases or exchanges of shares by a particular
purchaser or group, for example, when a pattern of frequent purchases and
sales of shares of a Fund is evident, or if the purchase and sale or exchange
orders are, or a subsequent abrupt redemption might be, of a size that would
disrupt management of a Fund. Goldman Sachs reserves the right to limit the
participation in the Fund of its partners and employees.
In addition to concessions allowed to Authorized Dealers, Goldman Sachs may,
from time to time, assist Authorized Dealers by, among other things, providing
sales literature to and holding informational programs for
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the benefit of Authorized Dealers' registered representatives. Authorized
Dealers may limit the participation of registered representatives in such
informational programs by means of sales incentive programs which may require
the sale of minimum dollar amounts of shares of the Goldman Sachs Portfolios.
Goldman Sachs may also provide additional promotional incentives to Authorized
Dealers in connection with sales of shares of the Goldman Sachs Portfolios.
These incentives may include payment for travel expenses, including lodging,
incurred in connection with trips taken by qualified registered
representatives and members of their families within or without the United
States. Incentive payments will be provided for out of the sales charge and
distribution fees or out of Goldman Sachs' other resources. Other than sales
charges and distribution fees, a Fund and its shareholders do not bear
distribution expenses. An Authorized Dealer receiving such incentives may be
deemed to be an underwriter under the 1933 Act. In some instances, such
incentives may be made available only to certain Authorized Dealers whose
representatives have sold or are expected to sell significant amounts of
shares.
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 Investment Company Act of
1940, as amended (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 Balanced, Growth and Income, CORE Large Cap Growth, Capital
Growth and Small Cap Equity Funds; limit the amount of such fee to 0.21% of
average daily net assets attributable to Class A shares of CORE U.S. Equity,
International Equity and Asia Growth Funds; and to limit such fee to 0.10% of
the average daily net assets attributable to Class A shares of Growth Funds.
Goldman Sachs has no current intention of modifying or discontinuing such
waiver, but may do so in the future at its discretion. The average rate for
the fiscal year ended January 31, 1997 paid by the Balanced, CORE U.S. Equity,
Growth and Income, Capital Growth, Small Cap Equity, International Equity and
Asia Growth Funds to Goldman Sachs was %, %, %, %, %, % and %,
respectively, with respect to each Fund's Class A shares.
Goldman Sachs may use the distribution fee for its expenses of distributing
of 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 SHARES
The Trust, on behalf of each Fund's Class B shares, has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act (the "Class B
Distribution Plan"). Under the Class B Distribution Plan, Goldman Sachs is
entitled
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to a quarterly fee from each Fund for distribution services equal, on an
annual basis, to 0.75% of a Fund's average daily net assets attributable to
Class B shares of such Fund. For the fiscal year ended January 31, 1997, 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 shares of the Funds. The types of expenses for which Goldman Sachs may
be compensated for distribution services under the Class B Distribution Plan
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 shares. If the fee
received by Goldman Sachs pursuant to the Class B Distribution Plan exceeds
its expenses, Goldman Sachs may realize a profit from these arrangements. The
Class B Distribution Plan will be reviewed and is subject to approval annually
by the Trustees. The aggregate compensation that may be received under the
Class B Distribution Plan for distribution services may not exceed the
limitations imposed by the NASD's Conduct Rules.
AUTHORIZED DEALER SERVICE PLANS
The Trust on behalf of each Fund's Class A and Class B shares has adopted
non-Rule 12b-1 Authorized Dealer Service Plans (each a "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 Class A or Class B Service Plan equal on an annual basis to 0.25% of
its average daily net assets attributable to Class A or Class B 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 Board of Trustees. For the fiscal year ended January
31, 1997, each Fund (other than the CORE Large Cap Growth, Growth and Emerging
Markets Equity Funds which did not offer Class A or Class B shares during the
fiscal year ended January 31, 1997) paid Authorized Dealer service fees at the
foregoing rate for each Funds' Class A and Class B shares.
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.
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A shareholder may request redemptions by telephone if the optional telephone
redemption privilege is elected on the Account Application. 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 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 implemented, the Trust may be liable for any
loss due to unauthorized or fraudulent transactions. In all other cases,
neither a Fund, the Trust nor Goldman Sachs will be responsible for the
authenticity of instructions received by telephone. 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.
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.
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 sale for tax
purposes. 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 or Class B 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 and Class B shares. The CDSC applicable to Class A
and Class B 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.
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DIVIDENDS
Each dividend from net investment income and capital gains distribution, if
any, declared by a Fund on its outstanding shares will, at the election of
each shareholder, be paid in (i) cash, (ii) additional shares of the same
class of the Fund or (iii) shares of the same or an equivalent class of any of
the Goldman Sachs Portfolios or units of the ILA Portfolios (the Prime
Obligations Portfolio only for Class B), 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 gain distributions
will be reinvested in the Fund.
The election to reinvest dividends and distributions paid by a 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. The Balanced
and Growth and Income Funds 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 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 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.
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.
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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. 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 shares reflect deduction of the
applicable CDSC imposed upon redemption of Class B 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 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 performance
rankings and indices.
The Balanced and Growth and Income Funds compute 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 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 and Class B shares will
be affected by the payment of a sales charge, distribution fees and other
class specific expenses. See "Shares of the Trust" below.
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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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 interest 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. The CORE Large Cap Growth, CORE U.S. Equity, Growth
and Income, Growth, International Equity, Asia Growth and Emerging Markets
Equity Funds offer four classes of shares: Institutional Shares, Service
Shares and the shares offered by this Prospectus which are designated as Class
A shares or Class B shares. The Balanced, Capital Growth and Small Cap Equity
Funds offer Class A shares and Class B shares.
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 entitle their holders to one vote per share, are freely transferable
and have no preemptive, subscription or conversion rights.
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, however, 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.
TAXATION
FEDERAL TAXES
Each Fund is treated as a separate entity for tax purposes. The CORE Large
Cap Growth, Growth 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 continue 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.
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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. 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 from
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 International
Equity, Asia Growth and Emerging Markets Equity Funds are not 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 on which a
shareholder may recognize a gain or loss.
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 intangibles 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.
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<PAGE>
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 (observed), Presidents' Day (observed), Good Friday, Memorial
Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
51
<PAGE>
APPENDIX
STATEMENT OF INTENTION
(APPLICABLE ONLY TO CLASS A SHARES PURCHASED SUBJECT TO A SALES CHARGE)
If a shareholder anticipates purchasing $50,000 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 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 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 & Co. 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 & Co. 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 & Co. 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.
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
140 FLEET STREET
LONDON, ENGLAND EC4A 2BJ
GOLDMAN, SACHS & CO.
DISTRIBUTOR
85 BROAD STREET
NEW YORK, NEW YORK 10004
GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) . . . . . . . . 800-526-7384
EQI/250K/596
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GOLDMAN SACHS EQUITY
FUNDS
- --------------------------------------------------------------------------------
PROSPECTUS
CLASS A AND B SHARES
GOLDMAN
SACHS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA UNITS
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management
investment company (a "mutual fund") which includes the Goldman Sachs--
Institutional Liquid Assets portfolios (the "Portfolios"). This Prospectus
relates only to the offering of ILA shares of beneficial interest ("ILA
Units") of the Portfolios. 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 following Portfolios seek 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. These
Portfolios may invest in diversified portfolios of the following types of
instruments:
Prime Obligations Portfolio. 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.
Money Market Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, U.S. dollar denominated obligations of U.S.
and foreign banks, U. S. dollar denominated commercial paper and other short-
term obligations of U.S. and foreign companies, foreign governments, states,
municipalities and other entities, and repurchase agreements.
Treasury Obligations Portfolio. Securities issued or guaranteed by the U.S.
Treasury and repurchase agreements relating to such securities.
Treasury Instruments Portfolio. Securities issued or guaranteed by the U.S.
Treasury.
Government Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, and repurchase agreements relating to such
securities.
Federal Portfolio. Securities of the U.S. Government and certain of its
agencies, authorities and instrumentalities, the interest income from which is
generally exempt from state income taxation.
The following Portfolios seek 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, and in the case of the Tax-
Exempt California Portfolio and Tax-Exempt New York Portfolio, exempt from
California state and New York state and city personal income taxes,
respectively, by investing primarily in municipal instruments. The Tax-Exempt
California and Tax-Exempt New York Portfolios concentrate their investments in
securities issued by or on behalf of California and New York municipal issuers
and therefore investment in such Portfolios may be riskier than other types of
money market funds. These Portfolios may invest in the following types of
instruments:
Tax-Exempt Diversified Portfolio. 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.
Tax-Exempt California Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of
California, and its political subdivisions, agencies and instrumentalities and
other obligations that are exempt from federal and California state income
taxes.
Tax-Exempt New York Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of New
York, and its political subdivisions, agencies and instrumentalities and other
obligations that are exempt from federal, New York state and New York City
personal income taxes.
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
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION..... Goldman Sachs Mutual Funds--Toll Free: 800-621-2550
This Prospectus provides you with information about the Portfolios that you
should know before investing in ILA Units. It should be read and retained for
future reference. If you would like more detailed information, the Statement
of Additional Information dated May 1, 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 & Co., 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. Not all Portfolios are available in
certain states. Please call the phone number listed above to determine
availability in your state.
- -------------------------------------------------------------------------------
ILA 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
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A PORTFOLIO 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.
The date of this Prospectus is May 1, 1997.
<PAGE>
UNITHOLDER AND PORTFOLIO EXPENSES (NOTE 1)
ILA UNITS (NOTE 2)
<TABLE>
<CAPTION>
PRIME MONEY TREASURY TREASURY TAX-EXEMPT TAX-EXEMPT
OBLIGATIONS MARKET OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL DIVERSIFIED CALIFORNIA
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ----------- ----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNITHOLDER TRANSAC-
TION EXPENSES
Maximum Sales
Charge Imposed on
Purchases......... None None None None None None None None
Sales Charge
Imposed on
Reinvested
Distributions..... None None None None None None None None
Deferred Sales
Load Imposed on
Redemptions....... None None None None None None None None
Exchange Fee...... None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage of average daily
net
assets)
Management Fees
(Note 3) (after
adjustments)...... 0.35% 0. % 0.35% 0. % 0.35% 0. % 0. % 0.35%
Other Expenses
(Note 3) (after
expense limita-
tion)............. 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING EX-
PENSES (Note 3).... 0.41% 0. % 0.41% 0. % 0.41% 0. % 0. % 0.41%
==== ==== ==== ==== ==== ==== ==== ====
<CAPTION>
TAX-
EXEMPT
NEW YORK
PORTFOLIO
---------
<S> <C>
UNITHOLDER TRANSAC-
TION EXPENSES
Maximum Sales
Charge Imposed on
Purchases......... None
Sales Charge
Imposed on
Reinvested
Distributions..... None
Deferred Sales
Load Imposed on
Redemptions....... None
Exchange Fee...... None
ANNUAL OPERATING
EXPENSES
(as a percentage of average daily
net
assets)
Management Fees
(Note 3) (after
adjustments)...... 0. %
Other Expenses
(Note 3) (after
expense limita-
tion)............. 0.06%
---------
TOTAL OPERATING EX-
PENSES (Note 3).... 0. %
=========
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Obligations Portfolio................ $ $ $ $
Money Market Portfolio..................... $ $ $ $
Treasury Obligations Portfolio............. $ $ $ $
Treasury Instruments Portfolio............. $ $ $ $
Government Portfolio....................... $ $ $ $
Federal Portfolio.......................... $ $ $ $
Tax-Exempt Diversified Portfolio........... $ $ $ $
Tax-Exempt California Portfolio............ $ $ $ $
Tax-Exempt New York Portfolio.............. $ $ $ $
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the
various costs and expenses that an investment in the Portfolios will bear
directly or indirectly. Operating expenses for the Treasury Instruments,
Federal and Tax-Exempt New York Portfolios are based on estimates of
expenses expected to be incurred during the fiscal year ending December
31, 1997. Operating expenses for the other Portfolios are based on actual
amounts incurred during the fiscal year ended December 31, 1996. These
expenses are expected to be incurred on an ongoing basis. The table and
hypothetical example should not be considered a representation of past or
future expenses; actual expenses may vary depending upon a variety of
factors including the actual performance of each Portfolio, which may be
greater or less than 5%. See "Management". Operating expenses incurred by
the Treasury Instruments, Federal and Tax-Exempt New York Portfolio's
during the fiscal year ended December 31, 1996 (expressed as a percentage
of average daily net assets after fee adjustments and expense limitations)
as follows:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------------
<S> <C> <C> <C>
Treasury Instruments Portfolio........... 0.% 0.06% 0.%
Federal Portfolio........................ 0.% 0.06% 0.%
Tax-Exempt New York Portfolio............ 0.% 0.06% 0.%
</TABLE>
(2) The information set forth in the foregoing table and example relates only
to ILA Units of the Portfolios. The Portfolios also offer ILA
Administration Units, ILA Service Units and ILA Class B Units (Prime
Obligations Portfolio only) which 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 Portfolios may be obtained from your sales
representative or from Goldman Sachs by calling the number on the front
cover of this Prospectus. See "Organization and Units of the Portfolios".
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed to
reduce or otherwise limit certain expenses of each Portfolio (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary
expenses), on an annualized basis, to the average daily net assets of such
Portfolio, less the effect of fee reductions, if any, shown in the above
table. The Adviser has also agreed that a portion of its fees will not be
imposed for the Money Market, Treasury Instruments, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios. The following table sets
forth the expenses payable by each Portfolio not reflecting the reduction
of fees otherwise payable and any expense limitations:
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------------
<S> <C> <C> <C>
Prime Obligations Portfolio.............. 0.35% 0. % 0. %
Money Market Portfolio................... 0.35% 0. % 0. %
Treasury Obligations Portfolio........... 0.35% 0. % 0. %
Treasury Instruments Portfolio........... 0.35% 0. % 0. %
Government Portfolio..................... 0.35% 0. % 0. %
Federal Portfolio........................ 0.35% 0. % 0. %
Tax-Exempt Diversified Portfolio......... 0.35% 0. % 0. %
Tax-Exempt California Portfolio.......... 0.35% 0. % 0. %
Tax-Exempt New York Portfolio............ 0.35% 0. % 0. %
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a unit (of the class specified) of the
Prime Obligations, Money Market, Treasury Obligations, Treasury Instruments,
Government, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-Ex-
empt New York Portfolios outstanding during the periods indicated have been
audited by 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 state-
ments and related notes incorporated by reference and attached to the State-
ment of Additional Information.
4
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
<PAGE>
AN INTRODUCTION TO THE PORTFOLIOS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment 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.
INVESTORS: The Portfolios are designed for investors seeking a high rate of
return, a stable net asset value and convenient liquidation privileges. The
Portfolios are particularly suitable for banks, corporations and other finan-
cial institutions that seek investment of short-term funds for their own ac-
counts or for the accounts of their customers.
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.
TAXABLE PORTFOLIOS: Prime Obligations, Money Market, Treasury Obliga-
tions, Treasury Instruments, Government and Federal Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE PORTFOLIOS: To seek 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 Treasury Instruments and Federal
Portfolios pursue their objectives by limiting their investments to certain
U.S. Treasury Obligations and U.S. Government Securities (each as defined
herein), respectively, the interest from which is generally exempt from
state income taxation. Each investor should consult his or her tax adviser
to determine whether distributions from the Treasury Instruments and Fed-
eral Portfolios (and any other Portfolio that may hold such obligations)
derived from interest on such obligations are exempt from state income tax-
ation in the investor's own state.
TAX-EXEMPT PORTFOLIOS: Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAX-EXEMPT PORTFOLIOS: To seek to
provide unitholders, to the extent consistent with the preservation of cap-
ital and prescribed portfolio standards, with a high level of income exempt
from federal income tax by investing primarily in Municipal Instruments, as
defined herein. In addition, the Tax-Exempt California and Tax-Exempt New
York Portfolios seek to provide unitholders with income exempt from Cali-
fornia state and New York state and city personal income taxes, respective-
ly.
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: Not more than ninety days.
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,
14
<PAGE>
comparable 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 Portfolios 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 as-
signed a rating, by that NRSRO. The Taxable Portfolios 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 Securi-
ties, 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.
15
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED &
US US OBLIGATIONS CORPORATIONS RECEIVABLES-
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prime
Obligations [_] [_] [_] [_] [_] [_] [_]
Portfolio US Banks Only US Entities Only Rated Only
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_] [_] [_] [_] [_] [_] [_]
Over 25% of total US and US and Foreign Rated Only
assets must be Foreign (US$) (US$) Entities
invested in US Commercial Paper
and Foreign
(US$) Banks
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government [_] [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal [_] [_] [_]
Portfolio (Does not intend
to invest)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio [_] [_]
Tax-Exempt Only
<CAPTION>
FOREIGN
GOVERNMENT
OBLIGATIONS
(US$)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_]
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio
</TABLE>
Note: See "Description of Securities and Investment Techniques" for a de-
scription of, and certain criteria applicable to, each of these categories
of investments.
16
<PAGE>
<TABLE>
<CAPTION>
SUMMARY
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED OF
MUNICIPALS MUNICIPALS QUALITY**** COMPANIES SECURITIES TAXATION*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations [_] [_] [_]
Portfolio First Up to 10% of Taxable Federal
Tier total assets and State**
in other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Money Market [_] [_] [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified [_] [_] [_]
Porfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal and
(except in extraordinary Tier assets in Taxable
circumstances) other State***
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California [_] [_] [_]
Portfolio First or Up to 10% Tax-Exempt
At least 80% of net assets Second of total Federal and
in Municipal Instruments, Tier assets in California
and at least 65% of its other State
total assets must be investment
invested in California companies
Instruments, (except in
extraordinary circumstances)
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York [_] [_] [_]
Portfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal, New
and at least 65% of its Tier assets in York State and
total assets must be other New York City
invested in New York investment
Instruments, (except in companies
extraordinary circumstances)
<CAPTION>
MISCELLANEOUS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio May invest in
obligations of
the
International
Bank for
Reconstruction
and Development
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio
Under
extraordinary
circumstances,
may hold cash,
U.S. Government
Securities
subject to
state taxation
or cash
equivalents
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified
Porfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California
Portfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York
Portfolio May invest up
to 20% in AMT
securities and
may temporarily
invest in the
taxable money
market
instruments
described
herein.
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Security interest in many states.
*** Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
**** 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.
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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").
The Treasury Instruments and Federal Portfolios invest in U.S. Treasury Ob-
ligations and certain U.S. Government Securities, respectively, the interest
from which is generally exempt from state income taxation. Securities gener-
ally eligible for this exemption include those issued by the U.S. Treasury and
those issued by certain agencies, authorities or instrumentalities of the U.S.
Government, including the Federal Home Loan Banks, Federal Farm Credit Banks,
Tennessee Valley Authority and the Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Portfolio (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may also acquire securities issued or guar-
anteed as to principal and interest by the U.S. Government, its agencies, au-
thorities or instrumentalities in the form of custodial receipts that evidence
ownership of future
18
<PAGE>
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 obliga-
tions of the U.S. Government.
U.S. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "U.S. Bank
Obligations" limited to securities issued or guaranteed by U.S. banks (includ-
ing certificates of deposit, commercial paper, unsecured bank promissory notes
and bankers' acceptances) which have more than $1 billion in total assets at
the time of purchase. Such obligations may also include debt obligations is-
sued by U.S. subsidiaries of such banks.
The Money Market Portfolio may also invest in "Foreign Bank Obligations"
limited to U.S. dollar denominated obligations issued or guaranteed (including
fixed time deposits) by foreign banks which have more than $1 billion in total
assets at the time of purchase, U.S. branches of such foreign banks (Yankee
obligations), foreign branches of such foreign banks and foreign branches of
U.S. banks having more than $1 billion in total assets at the time of pur-
chase. Such bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligation
or by government regulation.
The Money Market Portfolio will invest more than 25% of its total assets in
bank obligations (whether foreign or domestic). However, if adverse economic
conditions prevail in the banking industry (such as substantial losses on
loans, increases in non-performing assets and charge-offs and declines in to-
tal deposits) the Portfolio may, for defensive purposes, temporarily invest
less than 25% of its total assets in bank obligations. As a result, the Port-
folio may be especially affected by favorable and adverse developments in or
related to the banking industry. The activities of U.S. banks and most foreign
banks are subject to comprehensive regulations which, in the case of U.S. reg-
ulations, have undergone substantial changes in the past decade. The enactment
of new legislation or regulations, as well as changes in interpretation and
enforcement of current laws, may affect the manner of operations and profit-
ability of domestic and foreign banks. Significant developments in the U.S.
banking industry have included deregulation of interest rates, increased com-
petition from other types of financial institutions, increased acquisition ac-
tivity, geographic expansion and, during the late 1980's, an increased number
of bank failures. Banks may be particularly susceptible to certain economic
factors, such as interest rate changes and adverse developments in the market
for real estate. Fiscal and monetary policy and general economic cycles can
affect the availability and cost of funds, loan demand and asset quality and
thereby impact the earnings and financial conditions of banks. See "Foreign
Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "Commercial
Paper" (including variable amount master demand notes and asset-backed commer-
cial paper) which is payable in U.S. dollars and is issued or guaranteed by
U.S. corporations, U.S. commercial banks, foreign corporations (Money Market
Portfolio only), foreign commercial banks (Money Market Portfolio only) or
other entities. In addition, the Portfolios may invest in other short-term ob-
ligations (including short-term funding agreements) payable in U.S. dollars
and issued or guaranteed by U.S. corporations, foreign corporations (Money
Market Portfolio only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios 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
19
<PAGE>
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. 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 insurance policy issued by a financial institution, or other
credit enhancements may be present. To the extent consistent with its
investment objectives and policies, each of the Prime Obligations and Money
Market Portfolios may invest in new types of mortgage-related securities and
in other asset-backed securities that may be developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market Portfolio may invest in U.S. dollar denominated obligations
(limited to commercial paper and other notes) issued or guaranteed by the gov-
ernments of or entities located or organized in countries that maintain a
short-term foreign currency rating in the highest short-term ratings category
by at least two NRSRO, or if unrated, deemed to be the equivalent quality by
the Trustees.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
CALIFORNIA INSTRUMENTS: Obligations issued by or on behalf of the State of
California and its political subdivisions, agencies and instrumentalities and
the governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from California state personal income tax.
NEW YORK INSTRUMENTS: Obligations issued by or on behalf of the State of New
York and its political subdivisions, agencies and instrumentalities and the
governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from New York state and New York city personal income tax.
20
<PAGE>
TYPES OF MUNICIPAL, CALIFORNIA AND NEW YORK INSTRUMENTS:
<TABLE>
<CAPTION>
TAX- TAX-
EXEMPT DIVERSIFIED EXEMPT CALIFORNIA TAX-EXEMPT NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED RATE NOTES AND In highest short- In one of the two In one of the two
SIMILAR DEBT term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
VARIABLE AND In highest short- In one of the two In one of the two
FLOATING RATE DEMAND term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
TAX-EXEMPT In highest rating In one of the two In one of the two
COMMERCIAL PAPER category highest rating highest rating
categories categories
- --------------------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two In one of the two In one of the two
highest rating highest rating highest rating
categories categories categories
- --------------------------------------------------------------------------------------
UNRATED NOTES, Determined to be of Determined to be of Determined to be of
PAPER, BONDS AND comparable quality comparable quality comparable quality
OTHER INSTRUMENTS by Adviser pursuant by Adviser pursuant by Adviser pursuant
to criteria approved to criteria approved to criteria approved
by the Trustees by the Trustees by the Trustees
</TABLE>
As a matter of fundamental policy, at least 80% of each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolio's net as-
sets will ordinarily be invested in Municipal Instruments. In addition, as a
matter of fundamental policy, at least 65% of each of the Tax-Exempt Califor-
nia and Tax-Exempt New York Portfolio's total assets will be invested in Cali-
fornia and New York Instruments, respectively, except in extraordinary circum-
stances. A Tax-Exempt Portfolio may temporarily invest in taxable money market
instruments or, in the case of the Tax-Exempt California and New York Portfo-
lios, in Municipal Instruments that are not California or New York Instru-
ments, respectively, when acceptable California and New York Instruments are
not available or 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 each Tax-Exempt Portfolio.
The Tax-Exempt California and Tax-Exempt New York Portfolios' distributions of
interest from Municipal Instruments other than California and New York Instru-
ments, respectively, may be subject to California and New York state and New
York city personal income taxes, respectively.
The Prime Obligations and Money Market Portfolios may invest in short-term
obligations issued or guaranteed by state and municipal governments when
yields on such securities are attractive compared to other taxable invest-
ments.
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
21
<PAGE>
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 a 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
maturity. 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 look to the creditworthiness of the
party providing unconditional demand features or other unconditional obliga-
tions to support the credit of the issuer of the security. A Portfolio may
consider the maturity of a variable or floating rate Municipal Instrument to
be shorter than its ultimate stated maturity if the Portfolio has the right to
demand prepayment of its principal at specified intervals prior to the
security's ultimate stated maturity, subject to the conditions for using amor-
tized cost valuation under the Investment Company Act. A Portfolio may pur-
chase such variable or floating rate obligations from the issuers or may pur-
chase certificates of participation, a type of floating or variable rate obli-
gation, which are interests in a pool of debt obligations held by a bank or
other financial institution.
INDUSTRIAL DEVELOPMENT BONDS. The Portfolios (other than the Treasury Obli-
gations, Treasury Instruments, Government and Federal Portfolios) may invest
in industrial development bonds (generally referred to under current tax law
as "private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to unitholders un-
der the federal alternative minimum tax. See
22
<PAGE>
"Taxes" and "Distributions." The Tax-Exempt New York Portfolio may invest up
to 20% of its net assets in private activity bonds. The Tax-Exempt Diversified
and Tax-Exempt California Portfolios do not currently intend to invest in such
bonds. If such policy should change in the future, unitholders would be noti-
fied and such investments would not exceed 20% of each Portfolio's net assets.
OTHER POLICIES. Ordinarily, the Tax-Exempt Portfolios expect that 100% of
their portfolio securities will be Municipal Instruments. However, the Portfo-
lios may hold cash or invest in short-term taxable securities as set forth
above. Such Portfolios may invest 25% or more of the value of their respective
total assets in Municipal Instruments which are related in such a way that an
economic, business or political development or change affecting one Municipal
Instrument would also affect the other Municipal Instruments. For example, the
Tax-Exempt Portfolios may invest all of their respective assets in (a) Munici-
pal Instruments the interest on which is paid solely from revenues from simi-
lar projects such as hospitals, electric utility systems, multi-family hous-
ing, nursing homes, commercial facilities (including hotels), steel companies
or life care facilities, (b) Municipal Instruments whose issuers are in the
same state (including, in the case of the Tax-Exempt California and Tax-Exempt
New York Portfolios, issuers in states other than California and New York, re-
spectively), or (c) industrial development obligations. Concentration of a
Portfolio's investments in these Municipal Instruments will subject the Port-
folio, 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 (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may purchase Municipal Instruments which
are backed by letters of credit, which will ordinarily be irrevocable, issued
by domestic banks or foreign banks (excluding Prime Obligations Portfolio)
which have a branch, agency or subsidiary in the United States. In addition,
these Portfolios may acquire securities in the form of custodial receipts
which evidence ownership 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 (other than the Treasury Obligations, Treasury In-
struments, Government and Federal Portfolios) may acquire the right to sell
the security to another party at a guaranteed price and date.
INVESTING IN CALIFORNIA AND NEW YORK
The Tax-Exempt California and Tax-Exempt New York Portfolios concentrate
their investments in California and New York Instruments, respectively. Conse-
quently, such Portfolios are more susceptible to factors adversely affecting
issuers of California and New York Instruments, respectively, and may be risk-
ier than comparable municipal bond funds and money market funds that do not
emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by politi-
cal and economic developments within the State of California (the "State"),
and by the financial condition of the State, its public authorities and polit-
ical subdivisions. From mid-1990 through 1993, California experienced substan-
tial financial difficulties related to weak performance of the once-booming
California economy, which caused substantial, broad-based revenue shortfalls.
The economy has entered a sustained recovery since late 1993. California's
long-term credit rating has been reduced in the past, and its ability to pro-
vide assistance to its public authorities and political subdivisions has been,
and could be further, impaired. Cutbacks in state aid could adversely affect
the financial condition of cities, counties and education districts previously
subject to severe fiscal constraints and facing a fall in their own tax col-
lections. California voters in the past have passed amendments to the Califor-
nia Constitution and other measures that limit the taxing and spending author-
ity of California governmental entities and future voter initiatives could re-
sult in adverse consequences affecting California Instruments.
23
<PAGE>
These factors, among others (including the outcome of related pending liti-
gation and the effects of several natural disasters such as the 1994 earth-
quake in Southern California), could reduce the credit standing of certain is-
suers of California Instruments. A more detailed discussion of the risks of
investing in California is included in the Statement of Additional Informa-
tion.
The Tax-Exempt New York Portfolio's investments can be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and
the City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York Instruments to meet their finan-
cial obligations. Certain substantial issuers of New York Instruments (includ-
ing issuers whose obligations may be acquired by the Portfolio) have experi-
enced serious financial difficulties in recent years. These difficulties have
at times jeopardized the credit standing and impaired the borrowing abilities
of all New York issuers and have generally contributed to higher interest
costs for their borrowings and fewer markets for their outstanding debt obli-
gations. In recent years, several different issues of municipal securities of
the State and its agencies and instrumentalities and of the City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Instruments has at times had the effect of permitting New York Instruments to
be issued with yields relatively lower, and after issuance, to trade in the
market at prices relatively higher, than comparably rated municipal obliga-
tions issued by other jurisdictions. A recurrence of the financial difficul-
ties previously experienced by certain issuers of New York Instruments could
result in defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York In-
struments. Although as of the date of this Prospectus, no issuers of New York
Instruments are in default with respect to the payment of their municipal ob-
ligations, the occurrence of any such default could affect adversely the mar-
ket values and marketability of all New York Instruments and, consequently,
the net asset value of the Portfolio's holdings. A more detailed discussion of
the risks of investing in New York is included in the Statement of Additional
Information.
If California, New York, or any of their local governmental entities are un-
able to meet their financial obligations, the corresponding Portfolio's in-
come, net asset value, ability to preserve or realize appreciation of capital
or liquidity could be adversely affected. Also, neither of these Portfolios is
a diversified fund (except to the extent that diversification is required for
federal income tax purposes). For these tax purposes, with respect to 50% of
the value of its total assets, none of these Portfolios invests more than 5%
of the value of its total assets in securities of a single issuer (except U.S.
Government Securities or securities of other investment companies), nor, with
respect to the other 50% of the value of its total assets, does it invest more
than 25% of the value of its total assets in the securities of a single issuer
(except U.S. Government Securities or securities of other regulated investment
companies). These Federal tax diversification requirements apply only at tax-
able quarter-ends and are subject to certain qualifications and exceptions.
Because they may invest a larger percentage of their assets in the securities
of fewer issuers than do diversified funds, these Portfolios may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may only en-
ter into repurchase agreements with primary dealers in U.S. Government Securi-
ties. A repurchase agreement is an agreement under which a Portfolio purchases
securities and the seller agrees to repurchase the securities within a partic-
ular time at a specified price. Such price will exceed the original purchase
price, the difference being income to the Portfolio,
24
<PAGE>
and will be unrelated to the interest rate on the purchased security. A Port-
folio's custodian or subcustodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure of the seller to repurchase the securities as agreed, a Portfolio could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement. In
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 (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advi-
sory agreements with the Adviser or any of its affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio 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, as permitted by applicable
law, 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 for-
ward 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 se-
curity to be sold increases prior to the settlement date. Although a Portfolio
would generally purchase securities on a when-issued or forward commitment ba-
sis with the intention of acquiring securities for its portfolio, the Portfo-
lio may dispose of a when-issued security or forward commitment prior to set-
tlement if the Adviser deems it appropriate 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 each Portfolio's investments in securities
of other investment companies will be subject to the limitations on such in-
vestments prescribed by the Investment Company Act. These limits include a
prohibition 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 assets in securities of any one investment company or more than
10% of its 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 investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the Acquiring Portfolio and will be subject to substan-
tially the same risks.
25
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT DIVERSIFIED PORTFOLIOS. Pursuant to Rule 2a-7 under
the Investment Company Act, each Taxable Portfolio and the Tax-Exempt Diversi-
fied Portfolio may not invest more than 5% of its total assets (taken at amor-
tized cost) in the securities of any one issuer (except U.S. Government Secu-
rities, 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. With respect to 75% of each Portfolio's as-
sets, not more than 10% of such Portfolio's total assets may be invested in
securities issued by or subject to demand features or guarantees from the same
issuer. Immediately after the Tax-Exempt Diversified Portfolio's acquisition
of any demand feature, guarantee or security that (after giving effect to an
associated demand feature or guarantee) is a Second Tier Security, not more
than 5% of the Portfolio's total assets may be invested in securities issued
by or subject to demand features or guarantees from the issuer of the acquired
Second Tier Security. The Tax-Exempt Diversified Portfolio's investments in
conduit securities (Municipal Securities providing for repayment by a person
other than the municipal issuer) which are Second Tier Securities are limited
to 5% of the Portfolio's total assets (1% per issuer). The foregoing operating
policies are more restrictive than the fundamental policy set forth in the
Statement of Additional Information.
TAX-EXEMPT CALIFORNIA AND NEW YORK PORTFOLIOS. Pursuant to Rule 2a-7, each
of the Tax-Exempt California and New York Portfolios may not, with respect to
75% of its total assets, invest more than 5% of its total assets (taken at am-
ortized cost) in the securities of any one issuer (except U.S. Government Se-
curities, repurchase agreements collateralized by such securities and certain
securities subject to a guarantee or unconditional demand feature). With re-
spect to 75% of each Portfolio's assets, not more than 10% of such Portfolio's
total assets may be invested in securities issued by or subject to demand fea-
tures or guarantees from the same issuer. Immediately after a Portfolio's ac-
quisition of any demand feature, guarantee or security that (after giving ef-
fect to an associated demand feature or guarantee) is a Second Tier Security,
nor more than 5% of the Portfolio's total assets may be invested in securities
issued by or subject to demand features or guarantees from the issuer of the
acquired Second Tier Security. Each Portfolio's investments in conduit securi-
ties (Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier Securities and limited to 5% of the
Portfolio's total assets (1% per issuer).
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 (except the Tax-Exempt California and
Tax-Exempt New York Portfolios' objectives of providing unitholders with in-
come exempt from California state and New York state and New York city per-
sonal income tax, respectively) cannot be changed without approval of a major-
ity of the outstanding units of that Portfolio. The Treasury Obligations Port-
folio's policy of limiting its investments to U.S. Treasury Obligations and
related repurchase agreements is also fundamental. All investment policies not
specifically designated as fundamental are non-fundamental and may be changed
without unitholder approval.
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
26
<PAGE>
determining and monitoring the liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance that
the market for restricted securities eligible for resale under Rule 144A will
continue to be liquid, the Adviser will carefully monitor each Portfolio's in-
vestments in these securities, focusing on such important factors, among oth-
ers, 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.
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, acts as investment adviser to the Portfolios. Goldman
Sachs registered as an investment adviser in 1981. As of March , 1997,
Goldman Sachs, together with its affiliates, acted as investment adviser, ad-
ministrator or distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable 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 each Portfolio's business af-
fairs and performs various unitholder servicing functions to the extent not
provided by other organizations. The management of each Portfolio is subject
to the supervision of the Board of Trustees and that Portfolio's investment
policies. 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 as-
sets as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- --------------
<S> <C> <C>
Prime Obligations Portfolio .35% %
Money Market Portfolio .35% %
Treasury Obligations Portfolio .35% %
Treasury Instruments Portfolio .35% %
Government Portfolio .35% %
Federal Portfolio .35% %
Tax-Exempt Diversified Portfolio .35% %
Tax-Exempt California Portfolio .35% %
Tax-Exempt New York Portfolio .35% %
</TABLE>
27
<PAGE>
The difference, if any, between the stated advisory fee and the actual advi-
sory 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,
taxes, interest, brokerage and litigation, indemnification and other extraor-
dinary expenses) on an annualized basis to .43% of the average daily net as-
sets of the Portfolio less the effect of fee reductions, if any. Such reduc-
tions or limits, if any, are calculated monthly on a cumulative basis. Any
such reductions or limits may be discontinued or modified only with the ex-
press approval of the Trustees. In addition, with respect to the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios, GSAM has voluntarily agreed not to impose all or a portion of its
advisory fee and/or to reduce or otherwise limit each Portfolio's annual total
operating expenses (excluding fees payable to Service Organizations, as de-
fined herein) to . %, . %, . %, . % and . % respectively, of average
daily net assets and for each other Portfolio to .41% of average daily net as-
sets. GSAM has no current intention to but may in the future discontinue or
modify any of such limitations at its discretion.
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. Goldman Sachs also serves as the Transfer
Agent of each Portfolio. For the transfer agency services, Goldman Sachs re-
ceives .04% (on an annualized basis) of the average daily net assets with re-
spect to each 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.
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, (except, in the
case of the Tax-Exempt Portfolios, tax-exempt interest), the excess of net
short-term capital gain over net long-term capital loss and taxable original
issue discount or market discount income will be taxable to unitholders as or-
dinary income. 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 taxable distributions of a Portfolio (in-
cluding a Portfolio that also pays exempt-interest dividends, as described be-
low) 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
28
<PAGE>
December 31 of the year in which they are declared. Unitholders will be in-
formed annually about the amount and character of distributions received from
the Portfolios for federal income tax purposes, including any distributions
that may constitute a return of capital or any distributions of the Tax-Exempt
Portfolios that may constitute a tax preference item under the federal alter-
native minimum tax.
The Tax-Exempt Portfolios intend to satisfy certain requirements of the Code
for the payment of "exempt-interest dividends" not included in unitholders'
federal gross income. The Tax-Exempt California Portfolio and the Tax-Exempt
New York Portfolio also intend to satisfy certain requirements of the Califor-
nia and New York City and State personal income tax laws, respectively, so
that exempt-interest dividends paid by these Portfolios will generally not be
subject to personal income tax of the relevant state (and, in the case of the
Tax-Exempt New York Portfolio, New York City personal income tax). Dividends
paid by a Portfolio from interest on tax-exempt obligations and properly des-
ignated by the Portfolio as exempt-interest dividends, including dividends at-
tributable to exempt-interest dividends received by a Portfolio from other
regulated investment companies, will generally be exempt from federal income
tax, although a portion of such dividends may be subject to the federal alter-
native minimum tax. Exempt-interest dividends will be considered in computing
the "adjusted current earnings" preference item for purposes of the corporate
federal alternative minimum tax, the corporate environmental tax, and the ex-
tent, if any, to which social 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 purchasing units of these Portfolios. Interest incurred to
purchase or carry units of these Portfolios will not be deductible for federal
income tax purposes to the extent related to exempt-interest dividends paid by
the Portfolios and may not be deductible in whole or in part for California or
New York City and State income tax purposes.
Exempt-interest dividends of the Tax-Exempt California and Tax-Exempt New
York Portfolios that are derived from interest on California and New York In-
struments, respectively, will generally not be subject to the personal income
tax of the corresponding state, and in the case of the Tax-Exempt New York
Portfolio, New York City personal income tax. Other distributions will gener-
ally be taxable to unitholders for these state and city tax purposes.
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.
If a Portfolio invests in foreign securities, it may be subject to foreign
withholding or other foreign taxes on income earned on such securities and is
expected to be unable to pass such taxes through to unitholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a unitholder may be subject to state, local or
foreign taxes on payments received from a Portfolio. A state income (and pos-
sibly local income and/or intangible property) tax exemption is generally
available to the extent a Portfolio's distributions are derived from interest
on (or, in the case of intangibles taxes, the value of its assets is attribut-
able to) certain U.S. Government obligations and/or tax-exempt municipal obli-
gations issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Unitholders
should consult their own tax advisers concerning these matters.
29
<PAGE>
NET ASSET VALUE
The net asset value of each Portfolio is determined as of the close of regu-
lar 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 attributable
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 Treasury
Instruments and Federal Portfolios will cease, and each other Portfolio re-
serves the right to cease, accepting purchase and redemption orders for same
Business Day credit at the time the PSA recommends that the securities market
close. On days any Portfolio closes early, purchase and redemption orders re-
ceived after the PSA recommended closing time will be credited to the next
Business Day. In addition, each Portfolio reserves the right to advance the
time by which purchase and redemption orders must be received for same Busi-
ness Day credit as permitted 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 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 relevant 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. In
addition to the above, each Fund may from time to time advertise its perfor-
mance relative to certain rankings or indices. 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 advertisement). This income is then
annualized; that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed rein-
vestment.
The Tax-Exempt Portfolios and the Federal and Treasury Instruments Portfo-
lios may each also quote tax-equivalent yield. Each 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
(which, in the case of the Tax-Exempt California combines federal and state
taxes, in the case of Tax-Exempt New York Portfolio, combines federal, state
and city taxes, and in the case of the Federal and Treasury Instruments Port-
folios assumes a level of state taxes) of the Portfolio's yield, assuming cer-
tain tax brackets 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 yield, effective yield or tax-equivalent yield for any prior
30
<PAGE>
period should not be considered a representation of what an investment may
earn or what a Portfolio's yield, effective yield or tax-equivalent yield may
be in any future period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately 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 trust, and
were reorganized into the Trust as of May 1, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify units of benefi-
cial interests in separate series, without further action by unitholders. Ad-
ditional 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. The Trustees have authorized the issuance of three classes of units
of each of the Portfolios, which are: ILA Units, ILA Administration Units and
ILA Service Units, except for the Prime Obligations Portfolio which has four
classes of units: ILA Units, ILA Administration Units, ILA Service Units and
ILA Class B Units. (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 by the Trust. In the
event of liquidation, unitholders are entitled to share pro rata in the net
assets of the applicable Portfolio available for distribution to such
unitholders. Units entitle their holders to one vote per unit (but may, at the
discretion of the Trustees, be voted on a net asset value basis), have
noncumulative voting rights, are freely transferable and have no preemptive or
subscription rights.
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 Act, commu-
nicate with other unitholders in connection with requiring a special meeting
of unitholders. The Board of Trustees, however, 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.
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.
As of , 1997, , owned beneficially % of the outstanding
units of Portfolio.
The Trust does not intend to hold annual unitholder meetings, although spe-
cial meetings may be called for such purposes as electing or removing Trust-
ees, complying with a requirement of the Investment Company Act, or such other
purposes as are set forth above. The Trust will facilitate unitholder communi-
cation as required and in the manner prescribed by Section 16(c) of the In-
vestment Company Act.
31
<PAGE>
PURCHASE OF UNITS
ILA Units of a Portfolio may be purchased on any Business Day at the net as-
set value next determined after receipt of a purchase order in the manner set
forth below, and provided that The Northern Trust Company ("Northern"), Chica-
go, Illinois, the subcustodian for State Street Bank and Trust Company ("State
Street"), receives the purchase price in Federal Funds on the same Business
Day. Purchase orders may be made by telephoning Goldman Sachs at 800-621-2550
or by a written request addressed to Goldman Sachs, Attention: Shareholder
Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606. It
is strongly recommended that payment be effected by wiring Federal Funds to
Northern.
Purchases of ILA Units may also be made by delivering a Federal Reserve
draft or check (except that a third party check will not be accepted) payable
only to the appropriate Portfolio and drawn on a U.S. bank to Goldman Sachs,
Attention: Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower, Chica-
go, Illinois 60606. 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. ILA Units
purchased by check may not be redeemed until the check has cleared, as de-
scribed under "Redemption of Units."
Purchases of ILA Units of any Portfolio may also be made through an Auto-
mated Clearing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
ILA Units of each Portfolio are deemed to have been purchased when an order
becomes effective and are entitled to dividends on ILA Units purchased as fol-
lows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED BY
GOLDMAN SACHS DIVIDENDS BEGIN
----------------------- ---------------
(1) In the case of the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government and Federal Portfolios
<S> <C> <C> <C> <C>
By: 3:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios
By: 1:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 1:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
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 Units of the Portfolios are purchased at the net asset value per unit
without the imposition of a sales charge. However, banks, trust companies or
other institutions through which investors acquire ILA Units may impose
charges in connection with transactions in such Units.
Goldman Sachs, as each Portfolio's transfer agent, will maintain a complete
record of transactions and ILA Units held in each unitholder's account. The
Trust and Goldman Sachs each reserves the right to reject any purchase order
for any reason.
INITIAL PURCHASES
The minimum initial investment is $50,000, which may be allocated among the
Portfolios. The Trust and Goldman Sachs each reserves the right to waive the
minimum investment requirement. Before or immediately after placing an initial
purchase order, investors should complete and send to Goldman Sachs the Ac-
count Information Form included at the end of this Prospectus.
SUBSEQUENT INVESTMENTS
There is no minimum amount required for subsequent investments. Orders for
the purchase of additional ILA Units should be accompanied by information
identifying the account and the Portfolio in which ILA Units are to be pur-
chased.
REPORTS TO UNITHOLDERS
ILA Unitholders of each Portfolio will receive an annual report containing
audited financial statements and a semiannual report. Each ILA Unitholder will
also be furnished with an individual monthly statement. Upon request, a
printed confirmation for each transaction will be provided by Goldman Sachs.
Any dividends and distributions paid by the Portfolios are also reflected in
regular statements issued by Goldman Sachs. A year-to-date statement for any
account will be provided upon request made to Goldman Sachs. ILA Unitholders
with inquiries regarding a Portfolio may call Goldman Sachs at 800-621-2550
(8:00 a.m. to 6:30 p.m. New York time) or write Goldman Sachs at the address
shown under "The Distributor and Transfer Agent".
SUB-ACCOUNTING SERVICES
The Trust has designed special procedures to assist banks and other institu-
tional investors 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 un-
less 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 unit balance at month end and the monthly income together with the
total unit balance and monthly income for the master account.
To assist banks and other institutional investors performing their own sub-
accounting, each Portfolio's daily income per unit, calculated to nine decimal
places, and its annualized yield are normally available by 4:00 p.m. New York
time each day.
33
<PAGE>
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
to ILA Unitholders monthly. Distributions will be made in additional ILA Units
of the same Portfolio or, at the election of ILA Unitholders, in cash. The
election to reinvest dividends and distributions or receive them in cash may
be changed at any time upon written notice to Goldman Sachs. If no election is
made, all dividends and capital gain distributions will be reinvested. Divi-
dends will be reinvested as of the last calendar day of each month. Cash dis-
tributions will be paid on or about the first business day of each month. Net
short-term capital gains, if any, will be distributed in accordance with the
requirements of the Code and may be reflected in a Portfolio's daily distribu-
tions. Each Portfolio may distribute at least annually its long-term capital
gains, if any, after reduction by available capital losses. In order to avoid
excessive fluctuations 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 sub-
sequent calendar 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.
EXCHANGES
ILA Units of each Portfolio may be exchanged for units or shares of the cor-
responding class of any Portfolio or Fund of Goldman Sachs Trust at the net
asset value next determined either by writing to Goldman Sachs, Attention:
Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606 or by calling Goldman Sachs at 800-621-2550. All telephone exchanges
must be registered in the same name(s) and with the same address as are regis-
tered in the Portfolio from which the exchange is being made. It may be diffi-
cult to implement the telephone exchange privilege in times of drastic eco-
nomic 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. Exchanges are available only in states where the exchange may legally
be made. The exchange privilege may be modified or withdrawn at any time on 60
days' written notice.
REDEMPTION OF UNITS
HOW TO REDEEM
ILA Unitholders may redeem ILA Units of a Portfolio without charge upon re-
quest on any Business Day at the net asset value next determined after receipt
of the redemption request. Redemption requests may be made by telephoning
Goldman Sachs at 800-621-2550 or by a written request addressed to Goldman
Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower,
Chicago, Illinois 60606. The letter of instruction must specify the number of
ILA Units of the particular Portfolio to be redeemed, the account number, pay-
ment instructions and the exact registration on the account. Signatures must
be guaranteed in
34
<PAGE>
accordance with the procedures set forth below, if the proceeds are to be paid
to other than pre-established instructions on file with the Portfolio. It may
be difficult to implement redemptions by telephone in times of drastic eco-
nomic or market changes.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If reasonable procedures are not implement-
ed, the Trust may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, neither the Trust nor Goldman Sachs will be
responsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Portfolios by
means of the check redemption privilege described below. Goldman Sachs re-
serves the right to redeem accounts with balances below $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs. The payment of
redemption proceeds for ILA Units recently purchased by check will be delayed
for up to 15 days until the check has cleared.
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
bank account designated on the ILA Unitholder's Account Information Form, un-
less payment by check has been requested.
<TABLE>
- -----------------------------------------------------------------------------
<CAPTION>
REDEMPTION
REDEMPTION REQUEST PROCEEDS
RECEIVED BY GOLDMAN SACHS ORDINARILY DIVIDENDS
----------------------------- ---------- -------------------
<S> <C> <C> <C>
(1) In the case of the Prime Obligations, Money Market, Treasury
Obligations,Treasury Instruments, Government and Federal Portfolios
By: 3:00 p.m.-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- -----------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Wired Next Earned on Day
Business request is received
Day
- -----------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios
By: 12:00 noon-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- -----------------------------------------------------------------------------
After: 12:00 noon-N.Y. time Wired Next Earned on Day
Business request is received
Day
- -----------------------------------------------------------------------------
</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 Information Form. Redemption proceeds will normally be wired as set
forth above, but may be paid up to three Business Days after receipt of a
properly executed
35
<PAGE>
redemption request. For example, payment may be delayed if the Federal 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 intermediaries
or the ILA Unitholder's bank in the transfer process. If a problem with such
performance arises, the ILA Unitholder should deal directly with such interme-
diaries or bank.
An ILA Unitholder may change the bank designated to receive redemption pro-
ceeds by providing a written notice to Goldman Sachs which has been signed by
the ILA Unitholder or its authorized representative. This signature must be
guaranteed by a bank, a securities broker or dealer, a credit union having au-
thority 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 associa-
tion or a clearing agency, provided that such institution satisfies the stan-
dards established by Goldman Sachs. Goldman Sachs may also require additional
documentation in connection with a request to change the designated bank.
CHECK REDEMPTION PRIVILEGE
An ILA Unitholder of any Portfolio may elect to have a special account with
State Street for the purpose of redeeming ILA Units from his or her account in
that Portfolio by check. When State Street receives a completed signature card
and authorization form, the ILA Unitholder will be provided with 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
fractional ILA Units will be redeemed to cover the amount of the check. Can-
celled checks will be returned to the ILA Unitholder by State Street.
The check redemption privilege enables an ILA Unitholder to receive the div-
idends declared on the ILA 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 an ILA Unitholder's account. If the
amount of a check is greater than the value of ILA Units held in the ILA
Unitholder's account, the check will be returned unpaid, and the ILA
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 ILA Unitholder or all ILA Unitholders in general. The
Trust and State Street reserve the right at any time to suspend the redemption
by check and intend to do so in the event that federal legislation or regula-
tions impose reserve requirements or other restrictions deemed by the Trustees
to be adverse to the interests of the Portfolios.
----------------
36
<PAGE>
APPENDIX
GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON ACCOUNT INFORMATION FORM
You are required by law to provide the Trust with your correct Social Secu-
rity or other 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 Trust
for the federal backup withholding tax on distributions, redemptions, ex-
changes 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 Reve-
nue Service (IRS). Backup withholding could apply to payments relating to your
account prior to the Trust's receipt of your TIN.
Special rules apply for certain entities. For example, for an account estab-
lished 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 with-
holding 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 with-
holding 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 securi-
ties and commodities dealers and others.
If you are a nonresident alien or foreign entity you must provide a com-
pleted Form W-8 to the Trust in order to avoid backup withholding on certain
payments. Other payments to you may be subject to nonresident alien withhold-
ing 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 MUTUAL FUNDS -- ACCOUNT INFORMATION FORM
This Account Information Form Should be Forwarded Promptly to Goldman, Sachs &
Co.
No Redemption Can be Made Prior to Its Receipt
Send to: Goldman Sachs Mutual Funds Master No. _______________
4900 Sears Tower Fund Use Only
Chicago, IL 60606
1-800-621-2250 Date: ____________________
Institutional Liquid Assets Portfolios
[_]Prime Obligations Portfolio [_]Goldman Sachs Adjustable Rate Gov-
ernment Fund
[_]Money Market Portfolio
[_]Treasury Obligations Portfolio [_]Goldman Sachs Short Duration Gov-
ernment Fund
[_]Treasury Instruments Portfolio
[_]Government Portfolio [_]Goldman Sachs Short Duration Tax-
Free Fund
[_]Federal Portfolio
[_]Tax-Exempt Diversified Portfolio [_]Goldman Sachs Core Fixed Income
Fund
[_]Tax-Exempt California Portfolio [_]Goldman Sachs Global Income Fund
[_]Tax-Exempt New York Portfolio [_]Other Goldman Sachs Portfolios
[_]Other Fill in Fund(s): ______________________
Fill in Fund(s): ______________________
A. ACCOUNT RECORD
- --------------------------------------------------------------------------------
- --------------------------------------- ---------------------------------------
Name of Account Telephone Number
- --------------------------------------- U.S. Citizen or
Street or P.O. Box Resident? Yes [_] No [_]
- --------------------------------------- If no is checked, fill in country of
City State Zip tax residence:
- --------------------------------------- ---------------------------------------
Attention
B. DIVIDENDS AND DISTRIBUTIONS -- Check appropriate box (see "Dividends" in
Prospectus)
- --------------------------------------------------------------------------------
Dividends (including net short-term [_] Cash [_] Units
capital gains) [_] Cash [_] Units
Net Long-Term Capital Gains [_] Units
Distributions
Dividends and capital gains reinvested
in another fund in the Goldman Sachs
Portfolios (see Prospectus for more
information)
Fill in Fund: _______________________
(If no box is checked, dividends and capital gains distributions will be
reinvested in the account.)
C. SOCIAL SECURITY NUMBER OR OTHER TAXPAYER IDENTIFICATION NUMBER CERTIFICATION
- --------------------------------------------------------------------------------
Taxpayer Identification Number: _________________________
Under penalties of perjury, I certify that (1) The number shown on this form is
my correct Taxpayer Identification Number (or I am waiting for a number to be
issued to me), and (2) I am not subject to backup withholding because I am
exempt from backup withholding or I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding. See the "Guidelines for
Certification of Taxpayer Identification Number on Account Information Form,"
contained in the Appendix to the accompanying Prospectus.
------------------------------- ---------------------------------------
SIGN Signature Name (print) and Title (if any)
HERE ------------------------------- ---------------------------------------
Date
D. OPTIONAL TELEPHONE EXCHANGE (see "Exchange Privilege" in Prospectus)
- --------------------------------------------------------------------------------
[_] Goldman, Sachs & Co. is hereby authorized to accept and act upon telephone
instructions from the undersigned or any other person for the exchange of
units of the Portfolio into any portfolio described in the accompanying
Prospectus. The undersigned understands and agrees that neither the
applicable Portfolio nor Goldman, Sachs & Co. will be liable for any loss,
expense, or cost arising out of any telephone request.
Continued on reverse side
<PAGE>
E. REDEMPTION PLANS -- check one box only (see "Redemption of Units" in
Prospectus)
- --------------------------------------------------------------------------------
[_]Iauthorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic, or other
instructions WITHOUT SIGNATURE GUARANTEE, from any person for the redemption
of units for the above account provided that the proceeds are transferred to
the following bank account(s) only. I understand any changes to the following
information must be made in writing to GOLDMAN, SACHS & CO., must contain the
appropriate number of signatures listed below and all signatures MUST BE
SIGNATURE GUARANTEED. Absent its own gross negligence, neither the applicable
Fund nor GOLDMAN, SACHS & CO., shall be liable for such redemption or for
payments made to any unauthorized account.
[_]I have furnished GOLDMAN, SACHS & CO., WITH A SIGNATURE GUARANTEE (see
section F). I authorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic,
or other instructions from any person for the redemption of units for the
above account provided that the proceeds are transmitted to the following
bank account(s) only. Any changes to the following information must be made
in writing to GOLDMAN, SACHS & CO., (but without signature guarantee) and
contain the appropriate number of signatures listed below. Absent its own
gross negligence, neither the applicable Fund nor GOLDMAN, SACHS & CO. shall
be liable for such redemptions or for payments made to any unauthorized
account.
Additional documentation may be required for certain accounts.
Please complete the following bank account information and place a line through
the unused portion.
Additional instructions may be added as separate pages, if necessary.
Number of Bank Account Destinations completed in Section E of this form: [_]
1) ____________________________________ 3) ____________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------- -------------------------------------
Street Address Street Address
------------------------------------- -------------------------------------
City State Zip City State Zip
------------------------------------- -------------------------------------
Account Name Account No. Account Name Account
No.
2) ____________________________________ 4) ____________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------- -------------------------------------
Street Address Street Address
------------------------------------- -------------------------------------
City State Zip City State Zip
------------------------------------- -------------------------------------
Account Name Account No. Account Name Account
No.
[_] Special Draft (Transfer Agent to Supply) [_] By Mail
F. SIGNATURE AUTHORIZATION
- --------------------------------------------------------------------------------
By the execution of this Account Information Form, the undersigned represents
and warrants that it has full right, power and authority to make the investment
applied for pursuant to this application and is acting for itself or in some
fiduciary capacity in making such investments. THE UNDERSIGNED UNDERSTANDS THAT
NON-MONEY MARKET FUNDS DO NOT MAINTAIN A CONSTANT NET ASSET VALUE AND FURTHER
THAT A CONSTANT NET ASSET VALUE IN MONEY MARKET FUNDS IS NOT GUARANTEED. AS A
RESULT THE UNDERSIGNED MAY EXPERIENCE A LOSS OF PRINCIPAL ON ITS INVESTMENTS.
The undersigned affirms that it has received a current prospectus for the
Portfolios and has reviewed the same.
Number of Signatures required to make changes to this form: [_]
------------------------------- ---------------------------------------
SIGN Signature Name (print) and Title (if any)
HERE
------------------------------- --------------------------------------
Date
------------------------------- ---------------------------------------
Signature Name (print) and Title (if any)
------------------------------- ---------------------------------------
Date
G. SIGNATURE GUARANTEE
- --------------------------------------------------------------------------------
- --------------------------------------- Affix Guarantee Stamp Here
Signature Guaranteed By
- ---------------------------------------
Authorized Signature
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
ILA UNITS
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE:800-621-2550
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unitholder and Portfolio Expenses..........................................
Financial Highlights.......................................................
An Introduction to the Portfolios..........................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Units of the Portfolios...................................
Purchase of Units..........................................................
Reports to Unitholders.....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Units........................................................
Appendix...................................................................
Account Information Form
</TABLE>
ILA-1IS-MMT10K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA UNITS
------------
PROSPECTUS
------------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA ADMINISTRATION UNITS
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management
investment company (a "mutual fund") which includes the Goldman Sachs--
Institutional Liquid Assets portfolios (the "Portfolios"). This Prospectus
relates only to the offering of ILA Administration shares of beneficial
interest ("ILA Administration Units") of the Portfolios. 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 following Portfolios seek 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. These
Portfolios may invest in diversified portfolios of the following types of
instruments:
Prime Obligations Portfolio. 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.
Money Market Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, U.S. dollar denominated obligations of U.S.
and foreign banks, U.S. dollar denominated commercial paper and other short-
term obligations of U.S. and foreign companies, foreign governments, states,
municipalities and other entities, and repurchase agreements.
Treasury Obligations Portfolio. Securities issued or guaranteed by the U.S.
Treasury and repurchase agreements relating to such securities.
Treasury Instruments Portfolio. Securities issued or guaranteed by the U.S.
Treasury.
Government Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, and repurchase agreements relating to such
securities.
Federal Portfolio. Securities of the U.S. Government and certain of its
agencies, authorities and instrumentalities, the interest income from which is
generally exempt from state income taxation.
The following Portfolios seek, 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, and in the
case of the Tax-Exempt California Portfolio and Tax-Exempt New York Portfolio,
exempt from California state and New York state and city personal income
taxes, respectively, by investing primarily in municipal instruments. The Tax-
Exempt California and Tax-Exempt New York Portfolios concentrate their
investments in securities issued by or on behalf of California and New York
municipal issuers and therefore investment in such Portfolios may be riskier
than other types of money market funds. These Portfolios may invest in the
following types of instruments:
Tax-Exempt Diversified Portfolio. 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.
Tax-Exempt California Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of
California, and its political subdivisions, agencies and instrumentalities and
other obligations that are exempt from federal and California state income
taxes.
Tax-Exempt New York Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of New
York, and its political subdivisions, agencies and instrumentalities and other
obligations that are exempt from federal, New York state and New York City
personal income taxes.
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
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION
................................................................ Goldman Sachs
Mutual Funds--Toll Free: 800-621-2550
This Prospectus provides you with information about the Portfolios that you
should know before investing in ILA Administration Units. It should be read
and retained for future reference. If you would like more detailed
information, the Statement of Additional Information dated May 1, 1997, as
amended or supplemented from time to time, is available upon request without
charge from Service Organizations, as defined herein, or by calling the
telephone number listed above or by writing Goldman, Sachs & Co., 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. Not all Portfolios are available in
certain states. Please call the phone number listed above to determine
availability in your state.
- -------------------------------------------------------------------------------
ILA ADMINISTRATION 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 INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A
PORTFOLIO 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.
The date of this Prospectus is May 1, 1997.
<PAGE>
UNITHOLDER AND PORTFOLIO EXPENSES (NOTE 1)
ILA ADMINISTRATION UNITS (NOTE 2)
<TABLE>
<CAPTION>
TAX-
PRIME MONEY TREASURY TREASURY TAX-EXEMPT TAX-EXEMPT EXEMPT
OBLIGATIONS MARKET OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL DIVERSIFIED CALIFORNIA NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ----------- ----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Charge Imposed on
Purchases......... None None None None None None None None None
Sales Charge
Imposed on
Reinvested
Distributions..... None None None None None None None None None
Deferred Sales
Load Imposed on
Redemptions....... None None None None None None None None None
Exchange Fee...... None None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage
of average daily
net assets)
Management Fees
(Note 3) (after
adjustments)...... 0.35% 0. % 0.35% 0. % 0.35% 0. % 0. % 0.35% 0. %
Other Expenses....
Administration
Fees (Note 4).... 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Other Expenses
(Note 3) (after
expense
limitation)...... 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES (Note 3).. 0.56% 0. % 0.56% 0. % 0.56% 0. % 0. % 0.56% 0. %
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Obligations Portfolio................ $ $ $ $
Money Market Portfolio..................... $ $ $ $
Treasury Obligations Portfolio............. $ $ $ $
Treasury Instruments Portfolio............. $ $ $ $
Government Portfolio....................... $ $ $ $
Federal Portfolio.......................... $ $ $ $
Tax-Exempt Diversified Portfolio........... $ $ $ $
Tax-Exempt California Portfolio............ $ $ $ $
Tax-Exempt New York Portfolio.............. $ $ $ $
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the
various costs and expenses that an investment in the Portfolios will bear
directly or indirectly. Operating expenses for the ILA Administration
Units of the Treasury Instruments, Federal and Tax-Exempt New York
Portfolios are based on estimates of expenses expected to be incurred
during the fiscal year ending December 31, 1997. Operating expenses for
the other Portfolios are based on actual amounts incurred during the
fiscal year ended December 31, 1996. These expenses are expected to be
incurred on an ongoing basis. The table and hypothetical example should
not be considered a representation of past or future expenses; actual
expenses may vary depending upon a variety of factors including the actual
performance of each Portfolio, which may be greater or less than 5%. See
"Management." Operating expenses incurred by the Treasury Instruments,
Federal and Tax-Exempt New York Portfolios during the fiscal year ended
December 31, 1996 (expressed as a percentage of average daily net assets
after fee adjustments and expense limitations) were as follows:
<TABLE>
<CAPTION>
MANAGEMENT ADMINISTRATION OTHER TOTAL OPERATING
FEES FEES EXPENSES EXPENSES
---------- -------------- -------- ---------------
<S> <C> <C> <C> <C>
Treasury Instruments
Portfolio.............. 0.% 0.15% 0.06% 0.%
Federal Portfolio....... 0.% 0.15% 0.06% 0.%
Tax-Exempt New York
Portfolio.............. 0.% 0.15% 0.06% 0.%
</TABLE>
(2) The information set forth in the foregoing table and example relates only
to ILA Administration Units of the Portfolios. The Portfolios also offer
ILA Units, ILA Service Units and ILA Class B Units (Prime Obligations
Portfolio only) which 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 Portfolios may be obtained from your sales representative or from
Goldman Sachs by calling the number on the front cover of this Prospectus.
See "Organization and Units of the Portfolios."
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed to
reduce or otherwise limit certain expenses of each Portfolio (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary
expenses), on an annualized basis, to the average daily net assets of such
Portfolio, less the effect of fee reductions, if any, shown in the above
table. The Adviser has also agreed that a portion of its fees will not be
imposed for the Money Market, Treasury Instruments, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios. The following table sets
forth the expenses payable by each Portfolio not reflecting the reduction
of fees otherwise payable and any expense limitations:
<TABLE>
<CAPTION>
MANAGEMENT ADMINISTRATION OTHER TOTAL OPERATING
FEES FEES EXPENSES EXPENSES
---------- -------------- -------- ---------------
<S> <C> <C> <C> <C>
Prime Obligations Portfo-
lio..................... 0.35% 0.15% 0. % 0. %
Money Market Portfolio... 0.35% 0.15% 0. % 0. %
Treasury Obligations
Portfolio............... 0.35% 0.15% 0. % 0. %
Treasury Instruments
Portfolio............... 0.35% 0.15% 0. % 0. %
Government Portfolio..... 0.35% 0.15% 0. % 0. %
Federal Portfolio........ 0.35% 0.15% 0. % 0. %
Tax-Exempt Diversified
Portfolio............... 0.35% 0.15% 0. % 0. %
Tax-Exempt California
Portfolio............... 0.35% 0.15% 0. % 0. %
Tax-Exempt New York Port-
folio................... 0.35% 0.15% 0. % 0. %
</TABLE>
(4) Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of ILA Administration Units
in connection with their customers' accounts. See "Administration." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a unit (of the class specified) of the
Prime Obligations, Money Market, Treasury Obligations, Treasury Instruments,
Government, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-Ex-
empt New York Portfolios outstanding during the periods indicated have been
audited by 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 state-
ments and related notes incorporated by reference and attached to the State-
ment of Additional Information.
4
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
<PAGE>
AN INTRODUCTION TO THE PORTFOLIOS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment 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.
INVESTORS: The Portfolios are designed for investors seeking a high rate of
return, a stable net asset value and convenient liquidation privileges. The
Portfolios are particularly suitable for banks, corporations and other finan-
cial institutions that seek investment of short-term funds for their own ac-
counts or for the accounts of their customers.
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.
TAXABLE PORTFOLIOS: Prime Obligations, Money Market, Treasury Obliga-
tions, Treasury Instruments, Government and Federal Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE PORTFOLIOS: To seek 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 Treasury Instruments and Federal
Portfolios pursue their objectives by limiting their investments to certain
U.S. Treasury Obligations and U.S. Government Securities (each as defined
herein), respectively, the interest from which is generally exempt from
state income taxation. Each investor should consult his or her tax adviser
to determine whether distributions from the Treasury Instruments and Fed-
eral Portfolios (and any other Portfolio that may hold such obligations)
derived from interest on such obligations are exempt from state income tax-
ation in the investor's own state.
TAX-EXEMPT PORTFOLIOS: Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAX-EXEMPT PORTFOLIOS: To seek to
provide unitholders, to the extent consistent with the preservation of cap-
ital and prescribed portfolio standards, with a high level of income exempt
from federal income tax by investing primarily in Municipal Instruments, as
defined herein. In addition, the Tax-Exempt California and Tax-Exempt New
York Portfolios seek to provide unitholders with income exempt from Cali-
fornia state and New York state and city personal income taxes, respective-
ly.
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: Not more than ninety days.
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,
14
<PAGE>
comparable 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 Portfolios 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 as-
signed a rating, by that NRSRO. The Taxable Portfolios 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 Securi-
ties, 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.
15
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED &
US US OBLIGATIONS CORPORATIONS RECEIVABLES-
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prime
Obligations [_] [_] [_] [_] [_] [_] [_]
Portfolio US Banks Only US Entities Only Rated Only
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_] [_] [_] [_] [_] [_] [_]
Over 25% of total US and US and Foreign Rated Only
assets must be Foreign (US$) (US$) Entities
invested in US Commercial Paper
and Foreign
(US$) Banks
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government [_] [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal [_] [_] [_]
Portfolio (Does not intend
to invest)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio [_] [_]
Tax-Exempt Only
<CAPTION>
FOREIGN
GOVERNMENT
OBLIGATIONS
(US$)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_]
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio
</TABLE>
Note: See "Description of Securities and Investment Techniques" for a de-
scription of, and certain criteria applicable to, each of these categories
of investments.
16
<PAGE>
<TABLE>
<CAPTION>
SUMMARY
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED OF
MUNICIPALS MUNICIPALS QUALITY**** COMPANIES SECURITIES TAXATION*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations [_] [_] [_]
Portfolio First Up to 10% of Taxable Federal
Tier total assets and State**
in other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Money Market [_] [_] [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified [_] [_] [_]
Porfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal and
(except in extraordinary Tier assets in Taxable
circumstances) other State***
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California [_] [_] [_]
Portfolio First or Up to 10% Tax-Exempt
At least 80% of net assets Second of total Federal and
in Municipal Instruments, Tier assets in California
and at least 65% of its other State
total assets must be investment
invested in California companies
Instruments, (except in
extraordinary circumstances)
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York [_] [_] [_]
Portfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal, New
and at least 65% of its Tier assets in York State and
total assets must be other New York City
invested in New York investment
Instruments, (except in companies
extraordinary circumstances)
<CAPTION>
MISCELLANEOUS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio May invest in
obligations of
the
International
Bank for
Reconstruction
and Development
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio
Under
extraordinary
circumstances,
may hold cash,
U.S. Government
Securities
subject to
state taxation
or cash
equivalents
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified
Porfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California
Portfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York
Portfolio May invest up
to 20% in AMT
securities and
may temporarily
invest in the
taxable money
market
instruments
described
herein.
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Security interest in many states.
*** Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
**** 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.
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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").
The Treasury Instruments and Federal Portfolios invest in U.S. Treasury Ob-
ligations and certain U.S. Government Securities, respectively, the interest
from which is generally exempt from state income taxation. Securities gener-
ally eligible for this exemption include those issued by the U.S. Treasury and
those issued by certain agencies, authorities or instrumentalities of the U.S.
Government, including the Federal Home Loan Banks, Federal Farm Credit Banks,
Tennessee Valley Authority and the Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Portfolio (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may also acquire securities issued or guar-
anteed as to principal and interest by the U.S. Government, its agencies, au-
thorities or instrumentalities in the form of custodial receipts that evidence
ownership of future
18
<PAGE>
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 obliga-
tions of the U.S. Government.
U.S. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "U.S. Bank
Obligations" limited to securities issued or guaranteed by U.S. banks (includ-
ing certificates of deposit, commercial paper, unsecured bank promissory notes
and bankers' acceptances) which have more than $1 billion in total assets at
the time of purchase. Such obligations may also include debt obligations is-
sued by U.S. subsidiaries of such banks.
The Money Market Portfolio may also invest in "Foreign Bank Obligations"
limited to U.S. dollar denominated obligations issued or guaranteed (including
fixed time deposits) by foreign banks which have more than $1 billion in total
assets at the time of purchase, U.S. branches of such foreign banks (Yankee
obligations), foreign branches of such foreign banks and foreign branches of
U.S. banks having more than $1 billion in total assets at the time of pur-
chase. Such bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligation
or by government regulation.
The Money Market Portfolio will invest more than 25% of its total assets in
bank obligations (whether foreign or domestic). However, if adverse economic
conditions prevail in the banking industry (such as substantial losses on
loans, increases in non-performing assets and charge-offs and declines in to-
tal deposits) the Portfolio may, for defensive purposes, temporarily invest
less than 25% of its total assets in bank obligations. As a result, the Port-
folio may be especially affected by favorable and adverse developments in or
related to the banking industry. The activities of U.S. banks and most foreign
banks are subject to comprehensive regulations which, in the case of U.S. reg-
ulations, have undergone substantial changes in the past decade. The enactment
of new legislation or regulations, as well as changes in interpretation and
enforcement of current laws, may affect the manner of operations and profit-
ability of domestic and foreign banks. Significant developments in the U.S.
banking industry have included deregulation of interest rates, increased com-
petition from other types of financial institutions, increased acquisition ac-
tivity, geographic expansion and, during the late 1980's, an increased number
of bank failures. Banks may be particularly susceptible to certain economic
factors, such as interest rate changes and adverse developments in the market
for real estate. Fiscal and monetary policy and general economic cycles can
affect the availability and cost of funds, loan demand and asset quality and
thereby impact the earnings and financial conditions of banks. See "Foreign
Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "Commercial
Paper" (including variable amount master demand notes and asset-backed commer-
cial paper) which is payable in U.S. dollars and is issued or guaranteed by
U.S. corporations, U.S. commercial banks, foreign corporations (Money Market
Portfolio only), foreign commercial banks (Money Market Portfolio only) or
other entities. In addition, the Portfolios may invest in other short-term ob-
ligations (including short-term funding agreements) payable in U.S. dollars
and issued or guaranteed by U.S. corporations, foreign corporations (Money
Market Portfolio only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios 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
19
<PAGE>
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. 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 insurance policy issued by a financial institution, or other
credit enhancements may be present. To the extent consistent with its
investment objectives and policies, each of the Prime Obligations and Money
Market Portfolios may invest in new types of mortgage-related securities and
in other asset-backed securities that may be developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market Portfolio may invest in U.S. dollar denominated obligations
(limited to commercial paper and other notes) issued or guaranteed by the gov-
ernments of or entities located or organized in countries that maintain a
short-term foreign currency rating in the highest short-term ratings category
by at least two NRSRO, or if unrated, deemed to be the equivalent quality by
the Trustees.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
CALIFORNIA INSTRUMENTS: Obligations issued by or on behalf of the State of
California and its political subdivisions, agencies and instrumentalities and
the governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from California state personal income tax.
NEW YORK INSTRUMENTS: Obligations issued by or on behalf of the State of New
York and its political subdivisions, agencies and instrumentalities and the
governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from New York state and New York city personal income tax.
20
<PAGE>
TYPES OF MUNICIPAL, CALIFORNIA AND NEW YORK INSTRUMENTS:
<TABLE>
<CAPTION>
TAX- TAX-
EXEMPT DIVERSIFIED EXEMPT CALIFORNIA TAX-EXEMPT NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED RATE NOTES AND In highest short- In one of the two In one of the two
SIMILAR DEBT term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
VARIABLE AND In highest short- In one of the two In one of the two
FLOATING RATE DEMAND term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
TAX-EXEMPT In highest rating In one of the two In one of the two
COMMERCIAL PAPER category highest rating highest rating
categories categories
- --------------------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two In one of the two In one of the two
highest rating highest rating highest rating
categories categories categories
- --------------------------------------------------------------------------------------
UNRATED NOTES, Determined to be of Determined to be of Determined to be of
PAPER, BONDS AND comparable quality comparable quality comparable quality
OTHER INSTRUMENTS by Adviser pursuant by Adviser pursuant by Adviser pursuant
to criteria approved to criteria approved to criteria approved
by the Trustees by the Trustees by the Trustees
</TABLE>
As a matter of fundamental policy, at least 80% of each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolio's net as-
sets will ordinarily be invested in Municipal Instruments. In addition, as a
matter of fundamental policy, at least 65% of each of the Tax-Exempt Califor-
nia and Tax-Exempt New York Portfolio's total assets will be invested in Cali-
fornia and New York Instruments, respectively, except in extraordinary circum-
stances. A Tax-Exempt Portfolio may temporarily invest in taxable money market
instruments or, in the case of the Tax-Exempt California and New York Portfo-
lios, in Municipal Instruments that are not California or New York Instru-
ments, respectively, when acceptable California and New York Instruments are
not available or 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 each Tax-Exempt Portfolio.
The Tax-Exempt California and Tax-Exempt New York Portfolios' distributions of
interest from Municipal Instruments other than California and New York Instru-
ments, respectively, may be subject to California and New York state and New
York city personal income taxes, respectively.
The Prime Obligations and Money Market Portfolios may invest in short-term
obligations issued or guaranteed by state and municipal governments when
yields on such securities are attractive compared to other taxable invest-
ments.
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
21
<PAGE>
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 a 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
maturity. 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 look to the creditworthiness of the
party providing unconditional demand features or other unconditional obliga-
tions to support the credit of the issuer of the security. A Portfolio may
consider the maturity of a variable or floating rate Municipal Instrument to
be shorter than its ultimate stated maturity if the Portfolio has the right to
demand prepayment of its principal at specified intervals prior to the
security's ultimate stated maturity, subject to the conditions for using amor-
tized cost valuation under the Investment Company Act. A Portfolio may pur-
chase such variable or floating rate obligations from the issuers or may pur-
chase certificates of participation, a type of floating or variable rate obli-
gation, which are interests in a pool of debt obligations held by a bank or
other financial institution.
INDUSTRIAL DEVELOPMENT BONDS. The Portfolios (other than the Treasury Obli-
gations, Treasury Instruments, Government and Federal Portfolios) may invest
in industrial development bonds (generally referred to under current tax law
as "private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to unitholders un-
der the federal alternative minimum tax. See
22
<PAGE>
"Taxes" and "Distributions." The Tax-Exempt New York Portfolio may invest up
to 20% of its net assets in private activity bonds. The Tax-Exempt Diversified
and Tax-Exempt California Portfolios do not currently intend to invest in such
bonds. If such policy should change in the future, unitholders would be noti-
fied and such investments would not exceed 20% of each Portfolio's net assets.
OTHER POLICIES. Ordinarily, the Tax-Exempt Portfolios expect that 100% of
their portfolio securities will be Municipal Instruments. However, the Portfo-
lios may hold cash or invest in short-term taxable securities as set forth
above. Such Portfolios may invest 25% or more of the value of their respective
total assets in Municipal Instruments which are related in such a way that an
economic, business or political development or change affecting one Municipal
Instrument would also affect the other Municipal Instruments. For example, the
Tax-Exempt Portfolios may invest all of their respective assets in (a) Munici-
pal Instruments the interest on which is paid solely from revenues from simi-
lar projects such as hospitals, electric utility systems, multi-family hous-
ing, nursing homes, commercial facilities (including hotels), steel companies
or life care facilities, (b) Municipal Instruments whose issuers are in the
same state (including, in the case of the Tax-Exempt California and Tax-Exempt
New York Portfolios, issuers in states other than California and New York, re-
spectively), or (c) industrial development obligations. Concentration of a
Portfolio's investments in these Municipal Instruments will subject the Port-
folio, 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 (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may purchase Municipal Instruments which
are backed by letters of credit, which will ordinarily be irrevocable, issued
by domestic banks or foreign banks (excluding Prime Obligations Portfolio)
which have a branch, agency or subsidiary in the United States. In addition,
these Portfolios may acquire securities in the form of custodial receipts
which evidence ownership 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 (other than the Treasury Obligations, Treasury In-
struments, Government and Federal Portfolios) may acquire the right to sell
the security to another party at a guaranteed price and date.
INVESTING IN CALIFORNIA AND NEW YORK
The Tax-Exempt California and Tax-Exempt New York Portfolios concentrate
their investments in California and New York Instruments, respectively. Conse-
quently, such Portfolios are more susceptible to factors adversely affecting
issuers of California and New York Instruments, respectively, and may be risk-
ier than comparable municipal bond funds and money market funds that do not
emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by politi-
cal and economic developments within the State of California (the "State"),
and by the financial condition of the State, its public authorities and polit-
ical subdivisions. From mid-1990 through 1993, California experienced substan-
tial financial difficulties related to weak performance of the once-booming
California economy, which caused substantial, broad-based revenue shortfalls.
The economy has entered a sustained recovery since late 1993. California's
long-term credit rating has been reduced in the past, and its ability to pro-
vide assistance to its public authorities and political subdivisions has been,
and could be further, impaired. Cutbacks in state aid could adversely affect
the financial condition of cities, counties and education districts previously
subject to severe fiscal constraints and facing a fall in their own tax col-
lections. California voters in the past have passed amendments to the Califor-
nia Constitution and other measures that limit the taxing and spending author-
ity of California governmental entities and future voter initiatives could re-
sult in adverse consequences affecting California Instruments.
23
<PAGE>
These factors, among others (including the outcome of related pending liti-
gation and the effects of several natural disasters such as the 1994 earth-
quake in Southern California), could reduce the credit standing of certain is-
suers of California Instruments. A more detailed discussion of the risks of
investing in California is included in the Statement of Additional Informa-
tion.
The Tax-Exempt New York Portfolio's investments can be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and
the City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York Instruments to meet their finan-
cial obligations. Certain substantial issuers of New York Instruments (includ-
ing issuers whose obligations may be acquired by the Portfolio) have experi-
enced serious financial difficulties in recent years. These difficulties have
at times jeopardized the credit standing and impaired the borrowing abilities
of all New York issuers and have generally contributed to higher interest
costs for their borrowings and fewer markets for their outstanding debt obli-
gations. In recent years, several different issues of municipal securities of
the State and its agencies and instrumentalities and of the City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Instruments has at times had the effect of permitting New York Instruments to
be issued with yields relatively lower, and after issuance, to trade in the
market at prices relatively higher, than comparably rated municipal obliga-
tions issued by other jurisdictions. A recurrence of the financial difficul-
ties previously experienced by certain issuers of New York Instruments could
result in defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York In-
struments. Although as of the date of this Prospectus, no issuers of New York
Instruments are in default with respect to the payment of their municipal ob-
ligations, the occurrence of any such default could affect adversely the mar-
ket values and marketability of all New York Instruments and, consequently,
the net asset value of the Portfolio's holdings. A more detailed discussion of
the risks of investing in New York is included in the Statement of Additional
Information.
If California, New York, or any of their local governmental entities are un-
able to meet their financial obligations, the corresponding Portfolio's in-
come, net asset value, ability to preserve or realize appreciation of capital
or liquidity could be adversely affected. Also, neither of these Portfolios is
a diversified fund (except to the extent that diversification is required for
federal income tax purposes). For these tax purposes, with respect to 50% of
the value of its total assets, none of these Portfolios invests more than 5%
of the value of its total assets in securities of a single issuer (except U.S.
Government Securities or securities of other investment companies), nor, with
respect to the other 50% of the value of its total assets, does it invest more
than 25% of the value of its total assets in the securities of a single issuer
(except U.S. Government Securities or securities of other regulated investment
companies). These Federal tax diversification requirements apply only at tax-
able quarter-ends and are subject to certain qualifications and exceptions.
Because they may invest a larger percentage of their assets in the securities
of fewer issuers than do diversified funds, these Portfolios may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may only en-
ter into repurchase agreements with primary dealers in U.S. Government Securi-
ties. A repurchase agreement is an agreement under which a Portfolio purchases
securities and the seller agrees to repurchase the securities within a partic-
ular time at a specified price. Such price will exceed the original purchase
price, the difference being income to the Portfolio,
24
<PAGE>
and will be unrelated to the interest rate on the purchased security. A Port-
folio's custodian or subcustodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure of the seller to repurchase the securities as agreed, a Portfolio could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement. In
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 (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advi-
sory agreements with the Adviser or any of its affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio 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, as permitted by applicable
law, 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 for-
ward 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 se-
curity to be sold increases prior to the settlement date. Although a Portfolio
would generally purchase securities on a when-issued or forward commitment ba-
sis with the intention of acquiring securities for its portfolio, the Portfo-
lio may dispose of a when-issued security or forward commitment prior to set-
tlement if the Adviser deems it appropriate 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 each Portfolio's investments in securities
of other investment companies will be subject to the limitations on such in-
vestments prescribed by the Investment Company Act. These limits include a
prohibition 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 assets in securities of any one investment company or more than
10% of its 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 investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the Acquiring Portfolio and will be subject to substan-
tially the same risks.
25
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT DIVERSIFIED PORTFOLIOS. Pursuant to Rule 2a-7 under
the Investment Company Act, each Taxable Portfolio and the Tax-Exempt Diversi-
fied Portfolio may not invest more than 5% of its total assets (taken at amor-
tized cost) in the securities of any one issuer (except U.S. Government Secu-
rities, 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. With respect to 75% of each Portfolio's as-
sets, not more than 10% of such Portfolio's total assets may be invested in
securities issued by or subject to demand features or guarantees from the same
issuer. Immediately after the Tax-Exempt Diversified Portfolio's acquisition
of any demand feature, guarantee or security that (after giving effect to an
associated demand feature or guarantee) is a Second Tier Security, not more
than 5% of the Portfolio's total assets may be invested in securities issued
by or subject to demand features or guarantees from the issuer of the acquired
Second Tier Security. The Tax-Exempt Diversified Portfolio's investments in
conduit securities (Municipal Securities providing for repayment by a person
other than the municipal issuer) which are Second Tier Securities are limited
to 5% of the Portfolio's total assets (1% per issuer). The foregoing operating
policies are more restrictive than the fundamental policy set forth in the
Statement of Additional Information.
TAX-EXEMPT CALIFORNIA AND NEW YORK PORTFOLIOS. Pursuant to Rule 2a-7, each
of the Tax-Exempt California and New York Portfolios may not, with respect to
75% of its total assets, invest more than 5% of its total assets (taken at am-
ortized cost) in the securities of any one issuer (except U.S. Government Se-
curities, repurchase agreements collateralized by such securities and certain
securities subject to a guarantee or unconditional demand feature). With re-
spect to 75% of each Portfolio's assets, not more than 10% of such Portfolio's
total assets may be invested in securities issued by or subject to demand fea-
tures or guarantees from the same issuer. Immediately after a Portfolio's ac-
quisition of any demand feature, guarantee or security that (after giving ef-
fect to an associated demand feature or guarantee) is a Second Tier Security,
nor more than 5% of the Portfolio's total assets may be invested in securities
issued by or subject to demand features or guarantees from the issuer of the
acquired Second Tier Security. Each Portfolio's investments in conduit securi-
ties (Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier Securities and limited to 5% of the
Portfolio's total assets (1% per issuer).
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 (except the Tax-Exempt California and
Tax-Exempt New York Portfolios' objectives of providing unitholders with in-
come exempt from California state and New York state and New York city per-
sonal income tax, respectively) cannot be changed without approval of a major-
ity of the outstanding units of that Portfolio. The Treasury Obligations Port-
folio's policy of limiting its investments to U.S. Treasury Obligations and
related repurchase agreements is also fundamental. All investment policies not
specifically designated as fundamental are non-fundamental and may be changed
without unitholder approval.
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
26
<PAGE>
determining and monitoring the liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance that
the market for restricted securities eligible for resale under Rule 144A will
continue to be liquid, the Adviser will carefully monitor each Portfolio's in-
vestments in these securities, focusing on such important factors, among oth-
ers, 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.
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, acts as investment adviser to the Portfolios. Goldman
Sachs registered as an investment adviser in 1981. As of March , 1997,
Goldman Sachs, together with its affiliates, acted as investment adviser, ad-
ministrator or distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable 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 each Portfolio's business af-
fairs and performs various unitholder servicing functions to the extent not
provided by other organizations. The management of each Portfolio is subject
to the supervision of the Board of Trustees and that Portfolio's investment
policies. 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 as-
sets as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- --------------
<S> <C> <C>
Prime Obligations Portfolio .35% %
Money Market Portfolio .35% %
Treasury Obligations Portfolio .35% %
Treasury Instruments Portfolio .35% %
Government Portfolio .35% %
Federal Portfolio .35% %
Tax-Exempt Diversified Portfolio .35% %
Tax-Exempt California Portfolio .35% %
Tax-Exempt New York Portfolio .35% %
</TABLE>
27
<PAGE>
The difference, if any, between the stated advisory fee and the actual advi-
sory 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,
taxes, interest, brokerage and litigation, indemnification and other extraor-
dinary expenses) on an annualized basis to .43% of the average daily net as-
sets of the Portfolio less the effect of fee reductions, if any. Such reduc-
tions or limits, if any, are calculated monthly on a cumulative basis. Any
such reductions or limits may be discontinued or modified only with the ex-
press approval of the Trustees. In addition, with respect to the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios, GSAM has voluntarily agreed not to impose all or a portion of its
advisory fee and/or to reduce or otherwise limit each Portfolio's annual total
operating expenses (excluding fees payable to Service Organizations, as de-
fined herein) to . %, . %, . %, . % and . % respectively, of average
daily net assets and for each other Portfolio to .41% of average daily net as-
sets. GSAM has no current intention to but may in the future discontinue or
modify any of such limitations at its discretion.
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. Goldman Sachs also serves as the Transfer
Agent of each Portfolio. For the transfer agency services, Goldman Sachs re-
ceives .04% (on an annualized basis) of the average daily net assets with re-
spect to each 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.
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, (except, in the
case of the Tax-Exempt Portfolios, tax-exempt interest), the excess of net
short-term capital gain over net long-term capital loss and taxable original
issue discount or market discount income will be taxable to unitholders as or-
dinary income. 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 taxable distributions of a Portfolio (in-
cluding a Portfolio that also pays exempt-interest dividends, as described be-
low) 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
28
<PAGE>
December 31 of the year in which they are declared. Unitholders will be in-
formed annually about the amount and character of distributions received from
the Portfolios for federal income tax purposes, including any distributions
that may constitute a return of capital or any distributions of the Tax-Exempt
Portfolios that may constitute a tax preference item under the federal alter-
native minimum tax.
The Tax-Exempt Portfolios intend to satisfy certain requirements of the Code
for the payment of "exempt-interest dividends" not included in unitholders'
federal gross income. The Tax-Exempt California Portfolio and the Tax-Exempt
New York Portfolio also intend to satisfy certain requirements of the Califor-
nia and New York City and State personal income tax laws, respectively, so
that exempt-interest dividends paid by these Portfolios will generally not be
subject to personal income tax of the relevant state (and, in the case of the
Tax-Exempt New York Portfolio, New York City personal income tax). Dividends
paid by a Portfolio from interest on tax-exempt obligations and properly des-
ignated by the Portfolio as exempt-interest dividends, including dividends at-
tributable to exempt-interest dividends received by a Portfolio from other
regulated investment companies, will generally be exempt from federal income
tax, although a portion of such dividends may be subject to the federal alter-
native minimum tax. Exempt-interest dividends will be considered in computing
the "adjusted current earnings" preference item for purposes of the corporate
federal alternative minimum tax, the corporate environmental tax, and the ex-
tent, if any, to which social 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 purchasing units of these Portfolios. Interest incurred to
purchase or carry units of these Portfolios will not be deductible for federal
income tax purposes to the extent related to exempt-interest dividends paid by
the Portfolios and may not be deductible in whole or in part for California or
New York City and State income tax purposes.
Exempt-interest dividends of the Tax-Exempt California and Tax-Exempt New
York Portfolios that are derived from interest on California and New York In-
struments, respectively, will generally not be subject to the personal income
tax of the corresponding state, and in the case of the Tax-Exempt New York
Portfolio, New York City personal income tax. Other distributions will gener-
ally be taxable to unitholders for these state and city tax purposes.
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.
If a Portfolio invests in foreign securities, it may be subject to foreign
withholding or other foreign taxes on income earned on such securities and is
expected to be unable to pass such taxes through to unitholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a unitholder may be subject to state, local or
foreign taxes on payments received from a Portfolio. A state income (and pos-
sibly local income and/or intangible property) tax exemption is generally
available to the extent a Portfolio's distributions are derived from interest
on (or, in the case of intangibles taxes, the value of its assets is attribut-
able to) certain U.S. Government obligations and/or tax-exempt municipal obli-
gations issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Unitholders
should consult their own tax advisers concerning these matters.
29
<PAGE>
NET ASSET VALUE
The net asset value of each Portfolio is determined as of the close of regu-
lar 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 attributable
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 Treasury
Instruments and Federal Portfolios will cease, and each other Portfolio re-
serves the right to cease, accepting purchase and redemption orders for same
Business Day credit at the time the PSA recommends that the securities market
close. On days any Portfolio closes early, purchase and redemption orders re-
ceived after the PSA recommended closing time will be credited to the next
Business Day. In addition, each Portfolio reserves the right to advance the
time by which purchase and redemption orders must be received for same Busi-
ness Day credit as permitted 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 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 relevant 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. In
addition to the above, each Fund may from time to time advertise its perfor-
mance relative to certain rankings or indices. 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 advertisement). This income is then
annualized; that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed rein-
vestment.
The Tax-Exempt Portfolios and the Federal and Treasury Instruments Portfo-
lios may each also quote tax-equivalent yield. Each 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
(which, in the case of the Tax-Exempt California combines federal and state
taxes, in the case of Tax-Exempt New York Portfolio, combines federal, state
and city taxes, and in the case of the Federal and Treasury Instruments Port-
folios assumes a level of state taxes) of the Portfolio's yield, assuming cer-
tain tax brackets 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 yield, effective yield or tax-equivalent yield for any prior
30
<PAGE>
period should not be considered a representation of what an investment may
earn or what a Portfolio's yield, effective yield or tax-equivalent yield may
be in any future period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately 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 trust, and
were reorganized into the Trust as of May 1, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify units of benefi-
cial interests in separate series, without further action by unitholders. Ad-
ditional 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. The Trustees have authorized the issuance of three classes of units
of each of the Portfolios, which are: ILA Units, ILA Administration Units and
ILA Service Units, except for the Prime Obligations Portfolio which has four
classes of units: ILA Units, ILA Administration Units, ILA Service Units and
ILA Class B Units. (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 by the Trust. In the
event of liquidation, unitholders are entitled to share pro rata in the net
assets of the applicable Portfolio available for distribution to such
unitholders. Units entitle their holders to one vote per unit (but may, at the
discretion of the Trustees, be voted on a net asset value basis), have
noncumulative voting rights, are freely transferable and have no preemptive or
subscription rights.
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 Act, commu-
nicate with other unitholders in connection with requiring a special meeting
of unitholders. The Board of Trustees, however, 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.
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.
As of , 1997, , owned beneficially % of the outstanding
units of Portfolio.
The Trust does not intend to hold annual unitholder meetings, although spe-
cial meetings may be called for such purposes as electing or removing Trust-
ees, complying with a requirement of the Investment Company Act, or such other
purposes as are set forth above. The Trust will facilitate unitholder communi-
cation as required and in the manner prescribed by Section 16(c) of the In-
vestment Company Act.
31
<PAGE>
ADMINISTRATION
Each Portfolio has adopted an Administration Plan with respect to the ILA
Administration Units which authorizes it to compensate certain institutions
for providing account administration services to their customers who are bene-
ficial owners of such Units ("Service Organizations"). Each Portfolio will en-
ter into agreements with Service Organizations which purchase ILA Administra-
tion Units on behalf of their customers ("Service Agreements"). The Service
Agreements will provide for compensation to the Service Organization in an
amount up to .15 (on an annualized basis) of the average daily net assets of
the ILA Administration Units of that Portfolio attributable to or held in the
name of the Service Organization for its customers. 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, and
processing orders to purchase, redeem and exchange ILA Administration Units
for its customers. In addition, GSAM, at its own expense, may pay a Service
Organization compensation equal on an annual basis up to .10 of the average
daily net asset value of the ILA Administration Units attributable to or held
of record by such Service Organization for providing certain additional serv-
ices to its customers. Such compensation will not represent an additional ex-
pense to a Portfolio or its unitholders, since it will be paid from the assets
of GSAM.
For the fiscal year ended December 31, 1996, the Trust, on behalf of each
Portfolio, paid Service Organizations fees at the annual rate of .15% of each
Portfolio's average daily net assets attributable to ILA Administration Units.
Holders of ILA Administration 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 (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of ILA Administration Units 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 an investor's return with respect to an investment in a Portfolio.
All inquiries of beneficial owners of ILA Administration Units of the Port-
folios should be directed to such owners' Service Organization.
PURCHASE OF UNITS
It is expected that all direct purchasers of ILA Administration Units will
be Service Organizations or their nominees, which may purchase ILA Administra-
tion Units of the Portfolios through Goldman Sachs. Customers of Service Orga-
nizations may invest in such Units only through their Service Organizations.
As set forth below, ILA Administration Units of the Portfolios may be pur-
chased on any Business Day at the net asset value next determined after re-
ceipt from the Service Organization of both the purchase order and the pur-
chase price in Federal Funds. Purchase orders may be made by telephoning
Goldman Sachs at 800-621-2550 or by a written request addressed to Goldman
Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower,
Chicago, Illinois 60606. It is strongly recommended that payment be effected
by wiring Federal Funds to The Northern Trust Company ("Northern"), Chicago,
Illinois, as subcustodian for State Street Bank and Trust Company ("State
Street").
32
<PAGE>
Purchases of ILA Administration Units may also be made by a Service Organi-
zation by delivering a Federal Reserve draft or check (except that a third
party check will not be accepted) payable only to the appropriate Portfolio
and drawn on a U.S. bank to Goldman Sachs, Attention: Shareholder Services,
Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606. 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. ILA Administration Units purchased by check
may not be redeemed until the check has cleared, as described under "Redemp-
tion of Units".
Purchases of ILA Administration Units of any Portfolio may also be made
through an Automated Clearing House ("ACH") transfer to Goldman Sachs Trust
c/o Northern, as subcustodian for State Street. Purchase orders are effected
at the net asset value next determined after receipt of both the purchase or-
der and the purchase price in Federal Funds. It is expected that ACH transfers
will ordinarily be converted to Federal Funds on the Business Day following
receipt of the ACH transfer.
ILA Administration Units of each Portfolio are deemed to have been purchased
when an order becomes effective and are entitled to dividends on ILA Adminis-
tration Units purchased as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED FROM A
SERVICE
ORGANIZATION BY GOLDMAN SACHS DIVIDENDS BEGIN
-------------------------------- -----------------
(1) In the case of the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government and Federal Portfolios
<S> <C> <C>
By: 3:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios
By: 1:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 1:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
</TABLE>
The Service Organizations are responsible for timely transmittal of purchase
orders to Goldman Sachs and Federal Funds to Northern. In order to facilitate
timely transmittal, the Service Organizations have established times by which
purchase orders and Federal Funds must be received by them.
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 Administration Units of the Portfolios are purchased at the net asset
value per unit without the imposition of a sales charge. Goldman Sachs, as
each Portfolio's transfer agent, will maintain a complete record of transac-
tions and ILA Administration Units held in each record holder's account. The
Trust and Goldman Sachs each reserves 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 Administration Units. However, a Service Organization may im-
pose a minimum amount for initial and subsequent investments
33
<PAGE>
in ILA Administration Units of the Portfolios, and may establish other re-
quirements such as a minimum account balance. A Service Organization may ef-
fect 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. A Service Organization may purchase ILA Administration Units in con-
nection with sweep account programs.
REPORTS TO UNITHOLDERS
The Trust will issue an annual report containing audited financial state-
ments and a semiannual report to record holders of ILA Administration Units of
each Portfolio, including Service Organizations who hold such Units for the
benefit of their customers. Upon request, a printed confirmation for each
transaction will be provided by Goldman Sachs. Any dividends and distributions
paid by the Portfolios are also reflected in regular statements issued by
Goldman Sachs to unitholders of record. Service Organizations will be respon-
sible for providing similar services to their own customers who are the bene-
ficial owners of such Units.
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
to Service Organizations monthly. Distributions will be made in additional ILA
Administration Units of the same Portfolio or, at the election of a Service
Organization, in cash. The election to reinvest dividends and distributions or
receive them in cash may be changed by a Service Organization at any time upon
written notice to Goldman Sachs. If no election is made, all dividends 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 capital 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 Portfolio may dis-
tribute at least annually its long-term capital gains, if any, after reduction
by available capital losses. In order to avoid excessive fluctuations 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 calendar 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.
EXCHANGES
ILA Administration Units of each Portfolio may be exchanged by Service Orga-
nizations for units or shares of the corresponding class of any Portfolio or
Fund of Goldman Sachs Trust at the net asset value next determined either by
writing to Goldman Sachs, Attention: Shareholder Services, Goldman Sachs
Trust, 4900 Sears
34
<PAGE>
Tower, Chicago, Illinois 60606 or, by calling Goldman Sachs at 800-621-2550.
All telephone exchanges must be registered in the same name(s) and with the
same address as are registered in the Portfolio from which the exchange is be-
ing made. It may be difficult to implement the telephone exchange privilege in
times of drastic economic or market changes. In an effort to prevent unautho-
rized or fraudulent exchange requests by telephone, Goldman Sachs employs rea-
sonable procedures as set forth under "Redemption of Units" to confirm that
such instructions are genuine. Exchanges are available only in states where
the exchange may legally be made. The exchange privilege may be modified or
withdrawn at any time on 60 days' written notice.
REDEMPTION OF UNITS
HOW TO REDEEM
Customers of Service Organizations may redeem ILA Administration Units of a
Portfolio through their respective Service Organizations. The Service Organi-
zations are responsible for the transmittal of redemption requests by their
customers to Goldman Sachs. In order to facilitate timely transmittal of
redemption requests, Service Organizations have established procedures by
which redemption requests must be made and times by which redemption requests
must be received by them. Additional documentation may be required when deemed
appropriate by a Service Organization.
A Service Organization may redeem such Units without charge upon request on
any Business Day at the net asset value next determined after receipt by
Goldman Sachs of the redemption request. Redemption requests may be made by
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. It may be difficult to implement redemp-
tions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If reasonable procedures are not implement-
ed, the Trust may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, neither the Trust nor Goldman Sachs will be
responsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Portfolios by
means of the check redemption privilege described below. Goldman Sachs re-
serves the right to redeem accounts with balances below $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs by the Service
Organization. The payment of redemption proceeds for ILA Administration Units
recently purchased by check will be delayed for up to 15 days until the check
has cleared.
35
<PAGE>
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
record holder of ILA Administration Units.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
REDEMPTION REQUEST
RECEIVED FROM A REDEMPTION
SERVICE ORGANIZATION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
------------------------------------ ---------- ---------------------
(1) In the case of the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government and Federal Portfolios
<S> <C> <C> <C>
By: 3:00 p.m.-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- -------------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Wired Next Earned on Day
Business request is received
Day
- -------------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios
By: 12:00 noon-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- -------------------------------------------------------------------------------
After: 12:00 noon-N.Y. time Wired Next Earned on Day
Business request is received
Day
- -------------------------------------------------------------------------------
</TABLE>
The Portfolios will arrange for the proceeds of redemptions effected by any
means to be wired as Federal Funds to the Service Organization's bank account
designated in the Account Information Form. Redemption proceeds will normally
be wired as set forth above, but may be paid up to three Business Days after
receipt of the Service Organization's properly executed redemption request.
For example, payment may be delayed if the Federal 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 intermediaries or the ILA
Administration Unitholder's Service Organization in the transfer process. If a
problem with such performance arises, the ILA Administration Unitholder should
deal directly with such intermediaries or Service Organization.
CHECK REDEMPTION PRIVILEGE
A Service Organization may elect to have a special account with State Street
for the purpose of redeeming ILA Administration Units from its account in a
Portfolio by check. When State Street receives a completed signature card and
authorization form, the Service Organization will be provided with 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
fractional ILA Administration Units will be redeemed to cover the amount of
the check. Cancelled checks will be returned to the Service Organization by
State Street.
The check redemption privilege enables a Service Organization to receive the
dividends declared on the ILA Administration 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 an account. If the
amount of a check is greater than the value of ILA Administration Units held
in the Service Organization's account, the check will be returned unpaid, and
the Service Organization may be subject to extra charges.
36
<PAGE>
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 Service Organization or all Service Organizations in
general. The Trust and State Street reserve the right at any time to suspend
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 the Portfolios.
----------------
37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
ILA ADMINISTRATION UNITS
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unitholder and Portfolio Expenses..........................................
Financial Highlights.......................................................
An Introduction to the Portfolios..........................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Units of the Portfolios...................................
Administration.............................................................
Purchase of Units..........................................................
Reports to Unitholders.....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Units........................................................
</TABLE>
ILA-1AD-MMT 7K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA ADMINISTRATION UNITS
-----------
PROSPECTUS
-----------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA SERVICE UNITS
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management
investment company (a "mutual fund") which includes the Goldman Sachs--
Institutional Liquid Assets portfolios (the "Portfolios"). This Prospectus
relates only to the offering of ILA Service shares of beneficial interest
("ILA Service Units") of the Portfolios. 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 following Portfolios seek 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. These
Portfolios may invest in diversified portfolios of the following types of
instruments:
Prime Obligations Portfolio. 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.
Money Market Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, U.S. dollar denominated obligations of U.S.
and foreign banks, U.S. dollar denominated commercial paper and other short-
term obligations of U.S. and foreign companies, foreign governments, states,
municipalities and other entities, and repurchase agreements.
Treasury Obligations Portfolio. Securities issued or guaranteed by the U.S.
Treasury and repurchase agreements relating to such securities.
Treasury Instruments Portfolio. Securities issued or guaranteed by the U.S.
Treasury.
Government Portfolio. Securities of the U.S. Government, its agencies,
authorities and instrumentalities, and repurchase agreements relating to such
securities.
Federal Portfolio. Securities of the U.S. Government and certain of its
agencies, authorities and instrumentalities, the interest income from which is
generally exempt from state income taxation.
The following Portfolios seek, 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, and in the
case of the Tax-Exempt California Portfolio and Tax-Exempt New York Portfolio,
exempt from California state and New York state and city personal income
taxes, respectively, by investing primarily in municipal instruments. The Tax-
Exempt California and Tax-Exempt New York Portfolios concentrate their
investments in securities issued by or on behalf of California and New York
municipal issuers and therefore investment in such Portfolios may be riskier
than other types of money market funds. These Portfolios may invest in the
following types of instruments:
Tax-Exempt Diversified Portfolio. 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.
Tax-Exempt California Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of
California, and its political subdivisions, agencies and instrumentalities and
other obligations that are exempt from federal and California state income
taxes.
Tax-Exempt New York Portfolio. A non-diversified portfolio consisting
primarily of municipal obligations issued by or on behalf of the State of New
York, and its political subdivisions, agencies and instrumentalities and other
obligations that are exempt from federal, New York State and New York City
personal income taxes.
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
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION..... Goldman Sachs Mutual Funds--Toll Free: 800-621-2550
This Prospectus provides you with information about the Portfolios that you
should know before investing in ILA Service Units. It should be read and
retained for future reference. If you would like more detailed information,
the Statement of Additional Information dated May 1, 1997, as amended or
supplemented from time to time, is available upon request without charge from
Service Organizations, as defined herein, or by calling the telephone number
listed above or by writing Goldman, Sachs & Co., 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. Not all Portfolios are available in certain states.
Please call the phone number listed above to determine availability in your
state.
- -------------------------------------------------------------------------------
ILA SERVICE 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 INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A PORTFOLIO
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.
The date of this Prospectus is May 1, 1997.
<PAGE>
UNITHOLDER AND PORTFOLIO EXPENSES (NOTE 1)
ILA SERVICE UNITS (NOTE 2)
<TABLE>
<CAPTION>
TAX- TAX- TAX-
PRIME MONEY TREASURY TREASURY EXEMPT EXEMPT EXEMPT
OBLIGATIONS MARKET OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL DIVERSIFIED CALIFORNIA NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ----------- ----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITHOLDER
TRANSACTION
EXPENSES
Maximum Sales
Charge Imposed on
Purchases......... None None None None None None None None None
Sales Charge
Imposed on
Reinvested
Distributions..... None None None None None None None None None
Deferred Sales
Load Imposed on
Redemptions....... None None None None None None None None None
Exchange Fee...... None None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage
of average daily
net assets)
Management Fees
(Note 3) (after
adjustments)...... 0.35% 0. % 0.35% 0. % 0.35% 0. % 0. % 0.35% 0. %
Other Expenses
Service Fees
(Note 4)......... 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
Other Expenses
(Note 3) (after
expense
limitation)...... 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06% 0.06%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES (Note 3).. 0.81% 0. % 0.81% 0. % 0.81% 0. % 0. % 0.81% 0. %
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Obligations Portfolio................ $ $ $ $
Money Market Portfolio..................... $ $ $ $
Treasury Obligations Portfolio............. $ $ $ $
Treasury Instruments Portfolio............. $ $ $ $
Government Portfolio....................... $ $ $ $
Federal Portfolio.......................... $ $ $ $
Tax-Exempt Diversified Portfolio........... $ $ $ $
Tax-Exempt California Portfolio............ $ $ $ $
Tax-Exempt New York Portfolio.............. $ $ $ $
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the
various costs and expenses that an investment in the Portfolios will bear
directly or indirectly. Operating expenses for the ILA Service Units of
the Treasury Instruments, Federal, Tax-Exempt California and Tax-Exempt
New York Portfolios are based on estimates of expenses expected to be
incurred during the fiscal year ending December 31, 1997. Operating
expenses for the other Portfolios are based on actual amounts incurred
during the fiscal year ended December 31, 1996. These expenses are
expected to be incurred on an ongoing basis. The table and hypothetical
example should not be considered a representation of past or future
expenses; actual expenses may vary depending upon a variety of factors
including the actual performance of each Portfolio, which may be greater
or less than 5%. See "Management." Investors should be aware that, due to
the service fees, a long-term unitholder in a Portfolio may pay over time
more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities
Dealers, Inc. Operating expenses incurred by the Treasury Instruments,
Federal, Tax-Exempt California and Tax-Exempt New York Portfolios during
the fiscal year ended December 31, 1996 (expressed as a percentage of
average daily net assets after fee adjustments and expense limitations)
were as follows:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT SERVICE OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- ------- -------- ---------
<S> <C> <C> <C> <C>
Treasury Instruments Portfolio......... 0. % 0.40% 0.06% 0. %
Federal Portfolio...................... 0. % 0.40% 0.06% 0. %
Tax-Exempt California Portfolio........ 0. % 0.40% 0.06% 0. %
Tax-Exempt New York Portfolio.......... 0. % 0.40% 0.06% 0. %
</TABLE>
(2) The information set forth in the foregoing table and example relates only
to ILA Service Units of the Portfolios. The Portfolios also offer ILA
Units, ILA Administration Units and ILA Class B Units (Prime Obligations
Portfolio only) which 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 Portfolios may be obtained from your sales representative or from
Goldman Sachs by calling the number on the front cover of this Prospectus.
See "Organization and Units of the Portfolios".
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed to
reduce or otherwise limit certain expenses of each Portfolio (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary
expenses), on an annualized basis, to the average daily net assets of such
Portfolio, less the effect of fee reductions, if any, shown in the above
table. The Adviser has also agreed that a portion of its fees will not be
imposed for the Money Market, Treasury Instruments, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios. The following table sets
forth the expenses payable by each Portfolio not reflecting the reduction
of fees otherwise payable and any expense limitations:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT SERVICE OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- ------- -------- ---------
<S> <C> <C> <C> <C>
Prime Obligations Portfolio............ 0.35% 0.40% 0. % 0. %
Money Market Portfolio................. 0.35% 0.40% 0. % 0. %
Treasury Obligations Portfolio......... 0.35% 0.40% 0. % 0. %
Treasury Instruments Portfolio......... 0.35% 0.40% 0. % 0. %
Government Portfolio................... 0.35% 0.40% 0. % 0. %
Federal Portfolio...................... 0.35% 0.40% 0. % 0. %
Tax-Exempt Diversified Portfolio....... 0.35% 0.40% 0. % 0. %
Tax-Exempt California Portfolio........ 0.35% 0.40% 0. % 0. %
Tax-Exempt New York Portfolio.......... 0.35% 0.40% 0. % 0. %
</TABLE>
(4) Service Organizations (other than broker-dealers) may charge other fees to
their customers who are beneficial owners of ILA Service Units in
connection with their customers' accounts. See "Additional Services." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a unit (of the class specified) of the
Prime Obligations, Money Market, Treasury Obligations, Treasury Instruments,
Government, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-Ex-
empt New York Portfolios outstanding during the periods indicated have been
audited by 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 state-
ments and related notes incorporated by reference and attached to the State-
ment of Additional Information.
4
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
<PAGE>
AN INTRODUCTION TO THE PORTFOLIOS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment 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.
INVESTORS: The Portfolios are designed for investors seeking a high rate of
return, a stable net asset value and convenient liquidation privileges. The
Portfolios are particularly suitable for banks, corporations and other finan-
cial institutions that seek investment of short-term funds for their own ac-
counts or for the accounts of their customers.
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.
TAXABLE PORTFOLIOS: Prime Obligations, Money Market, Treasury Obliga-
tions, Treasury Instruments, Government and Federal Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE PORTFOLIOS: To seek 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 Treasury Instruments and Federal
Portfolios pursue their objectives by limiting their investments to certain
U.S. Treasury Obligations and U.S. Government Securities (each as defined
herein), respectively, the interest from which is generally exempt from
state income taxation. Each investor should consult his or her tax adviser
to determine whether distributions from the Treasury Instruments and Fed-
eral Portfolios (and any other Portfolio that may hold such obligations)
derived from interest on such obligations are exempt from state income tax-
ation in the investor's own state.
TAX-EXEMPT PORTFOLIOS: Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios.
INVESTMENT OBJECTIVES AND POLICIES FOR TAX-EXEMPT PORTFOLIOS: To seek to
provide unitholders, to the extent consistent with the preservation of cap-
ital and prescribed portfolio standards, with a high level of income exempt
from federal income tax by investing primarily in Municipal Instruments, as
defined herein. In addition, the Tax-Exempt California and Tax-Exempt New
York Portfolios seek to provide unitholders with income exempt from Cali-
fornia state and New York state and city personal income taxes, respective-
ly.
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: Not more than ninety days.
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,
14
<PAGE>
comparable 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 Portfolios 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 as-
signed a rating, by that NRSRO. The Taxable Portfolios 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 Securi-
ties, 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.
15
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED &
US US OBLIGATIONS CORPORATIONS RECEIVABLES-
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prime
Obligations [_] [_] [_] [_] [_] [_] [_]
Portfolio US Banks Only US Entities Only Rated Only
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_] [_] [_] [_] [_] [_] [_]
Over 25% of total US and US and Foreign Rated Only
assets must be Foreign (US$) (US$) Entities
invested in US Commercial Paper
and Foreign
(US$) Banks
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government [_] [_] [_]
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal [_] [_] [_]
Portfolio (Does not intend
to invest)
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California [_] [_]
Portfolio Tax-Exempt Only
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio [_] [_]
Tax-Exempt Only
<CAPTION>
FOREIGN
GOVERNMENT
OBLIGATIONS
(US$)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio [_]
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Government
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Federal
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New
York Portfolio
</TABLE>
Note: See "Description of Securities and Investment Techniques" for a de-
scription of, and certain criteria applicable to, each of these categories
of investments.
16
<PAGE>
<TABLE>
<CAPTION>
SUMMARY
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED OF
MUNICIPALS MUNICIPALS QUALITY**** COMPANIES SECURITIES TAXATION*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Prime Obligations [_] [_] [_]
Portfolio First Up to 10% of Taxable Federal
Tier total assets and State**
in other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Money Market [_] [_] [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments [_]
Portfolio First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and State**
assets in
other
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio [_]
First Up to 10% Taxable Federal
Tier of total and generally
assets in exempt from
other state taxation
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified [_] [_] [_]
Porfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal and
(except in extraordinary Tier assets in Taxable
circumstances) other State***
investment
companies
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California [_] [_] [_]
Portfolio First or Up to 10% Tax-Exempt
At least 80% of net assets Second of total Federal and
in Municipal Instruments, Tier assets in California
and at least 65% of its other State
total assets must be investment
invested in California companies
Instruments, (except in
extraordinary circumstances)
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York [_] [_] [_]
Portfolio At least 80% of net assets First or Up to 10% Tax-Exempt
in Municipal Instruments, Second of total Federal, New
and at least 65% of its Tier assets in York State and
total assets must be other New York City
invested in New York investment
Instruments, (except in companies
extraordinary circumstances)
<CAPTION>
MISCELLANEOUS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Prime Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Money Market
Portfolio May invest in
obligations of
the
International
Bank for
Reconstruction
and Development
- -------------------------------------------------------------------------------------------------------------------------
Treasury Obligations
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Treasury Instruments
Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Government Portfolio
- -------------------------------------------------------------------------------------------------------------------------
Federal Portfolio
Under
extraordinary
circumstances,
may hold cash,
U.S. Government
Securities
subject to
state taxation
or cash
equivalents
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt Diversified
Porfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt California
Portfolio 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.
- -------------------------------------------------------------------------------------------------------------------------
Tax-Exempt New York
Portfolio May invest up
to 20% in AMT
securities and
may temporarily
invest in the
taxable money
market
instruments
described
herein.
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Security interest in many states.
*** Taxable except for distributions from interest on obligations of an
investor's state of residence in certain states.
**** 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.
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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").
The Treasury Instruments and Federal Portfolios invest in U.S. Treasury Ob-
ligations and certain U.S. Government Securities, respectively, the interest
from which is generally exempt from state income taxation. Securities gener-
ally eligible for this exemption include those issued by the U.S. Treasury and
those issued by certain agencies, authorities or instrumentalities of the U.S.
Government, including the Federal Home Loan Banks, Federal Farm Credit Banks,
Tennessee Valley Authority and the Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Portfolio (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may also acquire securities issued or guar-
anteed as to principal and interest by the U.S. Government, its agencies, au-
thorities or instrumentalities in the form of custodial receipts that evidence
ownership of future
18
<PAGE>
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 obliga-
tions of the U.S. Government.
U.S. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "U.S. Bank
Obligations" limited to securities issued or guaranteed by U.S. banks (includ-
ing certificates of deposit, commercial paper, unsecured bank promissory notes
and bankers' acceptances) which have more than $1 billion in total assets at
the time of purchase. Such obligations may also include debt obligations is-
sued by U.S. subsidiaries of such banks.
The Money Market Portfolio may also invest in "Foreign Bank Obligations"
limited to U.S. dollar denominated obligations issued or guaranteed (including
fixed time deposits) by foreign banks which have more than $1 billion in total
assets at the time of purchase, U.S. branches of such foreign banks (Yankee
obligations), foreign branches of such foreign banks and foreign branches of
U.S. banks having more than $1 billion in total assets at the time of pur-
chase. Such bank obligations may be general obligations of the parent bank or
may be limited to the issuing branch by the terms of the specific obligation
or by government regulation.
The Money Market Portfolio will invest more than 25% of its total assets in
bank obligations (whether foreign or domestic). However, if adverse economic
conditions prevail in the banking industry (such as substantial losses on
loans, increases in non-performing assets and charge-offs and declines in to-
tal deposits) the Portfolio may, for defensive purposes, temporarily invest
less than 25% of its total assets in bank obligations. As a result, the Port-
folio may be especially affected by favorable and adverse developments in or
related to the banking industry. The activities of U.S. banks and most foreign
banks are subject to comprehensive regulations which, in the case of U.S. reg-
ulations, have undergone substantial changes in the past decade. The enactment
of new legislation or regulations, as well as changes in interpretation and
enforcement of current laws, may affect the manner of operations and profit-
ability of domestic and foreign banks. Significant developments in the U.S.
banking industry have included deregulation of interest rates, increased com-
petition from other types of financial institutions, increased acquisition ac-
tivity, geographic expansion and, during the late 1980's, an increased number
of bank failures. Banks may be particularly susceptible to certain economic
factors, such as interest rate changes and adverse developments in the market
for real estate. Fiscal and monetary policy and general economic cycles can
affect the availability and cost of funds, loan demand and asset quality and
thereby impact the earnings and financial conditions of banks. See "Foreign
Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations and Money Market Portfolios may invest in "Commercial
Paper" (including variable amount master demand notes and asset-backed commer-
cial paper) which is payable in U.S. dollars and is issued or guaranteed by
U.S. corporations, U.S. commercial banks, foreign corporations (Money Market
Portfolio only), foreign commercial banks (Money Market Portfolio only) or
other entities. In addition, the Portfolios may invest in other short-term ob-
ligations (including short-term funding agreements) payable in U.S. dollars
and issued or guaranteed by U.S. corporations, foreign corporations (Money
Market Portfolio only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios 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
19
<PAGE>
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. 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 insurance policy issued by a financial institution, or other
credit enhancements may be present. To the extent consistent with its
investment objectives and policies, each of the Prime Obligations and Money
Market Portfolios may invest in new types of mortgage-related securities and
in other asset-backed securities that may be developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market Portfolio may invest in U.S. dollar denominated obligations
(limited to commercial paper and other notes) issued or guaranteed by the gov-
ernments of or entities located or organized in countries that maintain a
short-term foreign currency rating in the highest short-term ratings category
by at least two NRSRO, or if unrated, deemed to be the equivalent quality by
the Trustees.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
CALIFORNIA INSTRUMENTS: Obligations issued by or on behalf of the State of
California and its political subdivisions, agencies and instrumentalities and
the governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from California state personal income tax.
NEW YORK INSTRUMENTS: Obligations issued by or on behalf of the State of New
York and its political subdivisions, agencies and instrumentalities and the
governments of Puerto Rico, the U.S. Virgin Islands and Guam, the interest
from which is excluded from gross income for federal income tax purposes and
is exempt from New York state and New York city personal income tax.
20
<PAGE>
TYPES OF MUNICIPAL, CALIFORNIA AND NEW YORK INSTRUMENTS:
<TABLE>
<CAPTION>
TAX- TAX-
EXEMPT DIVERSIFIED EXEMPT CALIFORNIA TAX-EXEMPT NEW YORK
PORTFOLIO PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED RATE NOTES AND In highest short- In one of the two In one of the two
SIMILAR DEBT term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
VARIABLE AND In highest short- In one of the two In one of the two
FLOATING RATE DEMAND term or one of the highest short-term highest short-term
INSTRUMENTS two highest long- or long-term rating or long-term rating
term rating categories categories
categories
- --------------------------------------------------------------------------------------
TAX-EXEMPT In highest rating In one of the two In one of the two
COMMERCIAL PAPER category highest rating highest rating
categories categories
- --------------------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two In one of the two In one of the two
highest rating highest rating highest rating
categories categories categories
- --------------------------------------------------------------------------------------
UNRATED NOTES, Determined to be of Determined to be of Determined to be of
PAPER, BONDS AND comparable quality comparable quality comparable quality
OTHER INSTRUMENTS by Adviser pursuant by Adviser pursuant by Adviser pursuant
to criteria approved to criteria approved to criteria approved
by the Trustees by the Trustees by the Trustees
</TABLE>
As a matter of fundamental policy, at least 80% of each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolio's net as-
sets will ordinarily be invested in Municipal Instruments. In addition, as a
matter of fundamental policy, at least 65% of each of the Tax-Exempt Califor-
nia and Tax-Exempt New York Portfolio's total assets will be invested in Cali-
fornia and New York Instruments, respectively, except in extraordinary circum-
stances. A Tax-Exempt Portfolio may temporarily invest in taxable money market
instruments or, in the case of the Tax-Exempt California and New York Portfo-
lios, in Municipal Instruments that are not California or New York Instru-
ments, respectively, when acceptable California and New York Instruments are
not available or 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 each Tax-Exempt Portfolio.
The Tax-Exempt California and Tax-Exempt New York Portfolios' distributions of
interest from Municipal Instruments other than California and New York Instru-
ments, respectively, may be subject to California and New York state and New
York city personal income taxes, respectively.
The Prime Obligations and Money Market Portfolios may invest in short-term
obligations issued or guaranteed by state and municipal governments when
yields on such securities are attractive compared to other taxable invest-
ments.
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
21
<PAGE>
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 a 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
maturity. 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 look to the creditworthiness of the
party providing unconditional demand features or other unconditional obliga-
tions to support the credit of the issuer of the security. A Portfolio may
consider the maturity of a variable or floating rate Municipal Instrument to
be shorter than its ultimate stated maturity if the Portfolio has the right to
demand prepayment of its principal at specified intervals prior to the
security's ultimate stated maturity, subject to the conditions for using amor-
tized cost valuation under the Investment Company Act. A Portfolio may pur-
chase such variable or floating rate obligations from the issuers or may pur-
chase certificates of participation, a type of floating or variable rate obli-
gation, which are interests in a pool of debt obligations held by a bank or
other financial institution.
INDUSTRIAL DEVELOPMENT BONDS. The Portfolios (other than the Treasury Obli-
gations, Treasury Instruments, Government and Federal Portfolios) may invest
in industrial development bonds (generally referred to under current tax law
as "private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to unitholders un-
der the federal alternative minimum tax. See
22
<PAGE>
"Taxes" and "Distributions." The Tax-Exempt New York Portfolio may invest up
to 20% of its net assets in private activity bonds. The Tax-Exempt Diversified
and Tax-Exempt California Portfolios do not currently intend to invest in such
bonds. If such policy should change in the future, unitholders would be noti-
fied and such investments would not exceed 20% of each Portfolio's net assets.
OTHER POLICIES. Ordinarily, the Tax-Exempt Portfolios expect that 100% of
their portfolio securities will be Municipal Instruments. However, the Portfo-
lios may hold cash or invest in short-term taxable securities as set forth
above. Such Portfolios may invest 25% or more of the value of their respective
total assets in Municipal Instruments which are related in such a way that an
economic, business or political development or change affecting one Municipal
Instrument would also affect the other Municipal Instruments. For example, the
Tax-Exempt Portfolios may invest all of their respective assets in (a) Munici-
pal Instruments the interest on which is paid solely from revenues from simi-
lar projects such as hospitals, electric utility systems, multi-family hous-
ing, nursing homes, commercial facilities (including hotels), steel companies
or life care facilities, (b) Municipal Instruments whose issuers are in the
same state (including, in the case of the Tax-Exempt California and Tax-Exempt
New York Portfolios, issuers in states other than California and New York, re-
spectively), or (c) industrial development obligations. Concentration of a
Portfolio's investments in these Municipal Instruments will subject the Port-
folio, 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 (other than the Treasury Obligations, Treasury Instruments,
Government and Federal Portfolios) may purchase Municipal Instruments which
are backed by letters of credit, which will ordinarily be irrevocable, issued
by domestic banks or foreign banks (excluding Prime Obligations Portfolio)
which have a branch, agency or subsidiary in the United States. In addition,
these Portfolios may acquire securities in the form of custodial receipts
which evidence ownership 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 (other than the Treasury Obligations, Treasury In-
struments, Government and Federal Portfolios) may acquire the right to sell
the security to another party at a guaranteed price and date.
INVESTING IN CALIFORNIA AND NEW YORK
The Tax-Exempt California and Tax-Exempt New York Portfolios concentrate
their investments in California and New York Instruments, respectively. Conse-
quently, such Portfolios are more susceptible to factors adversely affecting
issuers of California and New York Instruments, respectively, and may be risk-
ier than comparable municipal bond funds and money market funds that do not
emphasize these issuers to this degree.
The Tax-Exempt California Portfolio's investments can be affected by politi-
cal and economic developments within the State of California (the "State"),
and by the financial condition of the State, its public authorities and polit-
ical subdivisions. From mid-1990 through 1993, California experienced substan-
tial financial difficulties related to weak performance of the once-booming
California economy, which caused substantial, broad-based revenue shortfalls.
The economy has entered a sustained recovery since late 1993. California's
long-term credit rating has been reduced in the past, and its ability to pro-
vide assistance to its public authorities and political subdivisions has been,
and could be further, impaired. Cutbacks in state aid could adversely affect
the financial condition of cities, counties and education districts previously
subject to severe fiscal constraints and facing a fall in their own tax col-
lections. California voters in the past have passed amendments to the Califor-
nia Constitution and other measures that limit the taxing and spending author-
ity of California governmental entities and future voter initiatives could re-
sult in adverse consequences affecting California Instruments.
23
<PAGE>
These factors, among others (including the outcome of related pending liti-
gation and the effects of several natural disasters such as the 1994 earth-
quake in Southern California), could reduce the credit standing of certain is-
suers of California Instruments. A more detailed discussion of the risks of
investing in California is included in the Statement of Additional Informa-
tion.
The Tax-Exempt New York Portfolio's investments can be affected by political
and economic developments within the State of New York (the "State"), and by
the financial conditions of the State, its public authorities and political
subdivisions, particularly the City of New York (the "City"). The State and
the City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York Instruments to meet their finan-
cial obligations. Certain substantial issuers of New York Instruments (includ-
ing issuers whose obligations may be acquired by the Portfolio) have experi-
enced serious financial difficulties in recent years. These difficulties have
at times jeopardized the credit standing and impaired the borrowing abilities
of all New York issuers and have generally contributed to higher interest
costs for their borrowings and fewer markets for their outstanding debt obli-
gations. In recent years, several different issues of municipal securities of
the State and its agencies and instrumentalities and of the City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Instruments has at times had the effect of permitting New York Instruments to
be issued with yields relatively lower, and after issuance, to trade in the
market at prices relatively higher, than comparably rated municipal obliga-
tions issued by other jurisdictions. A recurrence of the financial difficul-
ties previously experienced by certain issuers of New York Instruments could
result in defaults or declines in the market values of those issuers' existing
obligations and, possibly, in the obligations of other issuers of New York In-
struments. Although as of the date of this Prospectus, no issuers of New York
Instruments are in default with respect to the payment of their municipal ob-
ligations, the occurrence of any such default could affect adversely the mar-
ket values and marketability of all New York Instruments and, consequently,
the net asset value of the Portfolio's holdings. A more detailed discussion of
the risks of investing in New York is included in the Statement of Additional
Information.
If California, New York, or any of their local governmental entities are un-
able to meet their financial obligations, the corresponding Portfolio's in-
come, net asset value, ability to preserve or realize appreciation of capital
or liquidity could be adversely affected. Also, neither of these Portfolios is
a diversified fund (except to the extent that diversification is required for
federal income tax purposes). For these tax purposes, with respect to 50% of
the value of its total assets, none of these Portfolios invests more than 5%
of the value of its total assets in securities of a single issuer (except U.S.
Government Securities or securities of other investment companies), nor, with
respect to the other 50% of the value of its total assets, does it invest more
than 25% of the value of its total assets in the securities of a single issuer
(except U.S. Government Securities or securities of other regulated investment
companies). These Federal tax diversification requirements apply only at tax-
able quarter-ends and are subject to certain qualifications and exceptions.
Because they may invest a larger percentage of their assets in the securities
of fewer issuers than do diversified funds, these Portfolios may be exposed to
greater risk in that an adverse change in the condition of one or a small num-
ber of issuers would have a greater impact on them.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may only en-
ter into repurchase agreements with primary dealers in U.S. Government Securi-
ties. A repurchase agreement is an agreement under which a Portfolio purchases
securities and the seller agrees to repurchase the securities within a partic-
ular time at a specified price. Such price will exceed the original purchase
price, the difference being income to the Portfolio,
24
<PAGE>
and will be unrelated to the interest rate on the purchased security. A Port-
folio's custodian or subcustodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure of the seller to repurchase the securities as agreed, a Portfolio could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement. In
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 (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advi-
sory agreements with the Adviser or any of its affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio 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, as permitted by applicable
law, 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 for-
ward 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 se-
curity to be sold increases prior to the settlement date. Although a Portfolio
would generally purchase securities on a when-issued or forward commitment ba-
sis with the intention of acquiring securities for its portfolio, the Portfo-
lio may dispose of a when-issued security or forward commitment prior to set-
tlement if the Adviser deems it appropriate 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 each Portfolio's investments in securities
of other investment companies will be subject to the limitations on such in-
vestments prescribed by the Investment Company Act. These limits include a
prohibition 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 assets in securities of any one investment company or more than
10% of its 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 investment compa-
nies will have investment objectives, policies and restrictions substantially
similar to those of the Acquiring Portfolio and will be subject to substan-
tially the same risks.
25
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT DIVERSIFIED PORTFOLIOS. Pursuant to Rule 2a-7 under
the Investment Company Act, each Taxable Portfolio and the Tax-Exempt Diversi-
fied Portfolio may not invest more than 5% of its total assets (taken at amor-
tized cost) in the securities of any one issuer (except U.S. Government Secu-
rities, 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. With respect to 75% of each Portfolio's as-
sets, not more than 10% of such Portfolio's total assets may be invested in
securities issued by or subject to demand features or guarantees from the same
issuer. Immediately after the Tax-Exempt Diversified Portfolio's acquisition
of any demand feature, guarantee or security that (after giving effect to an
associated demand feature or guarantee) is a Second Tier Security, not more
than 5% of the Portfolio's total assets may be invested in securities issued
by or subject to demand features or guarantees from the issuer of the acquired
Second Tier Security. The Tax-Exempt Diversified Portfolio's investments in
conduit securities (Municipal Securities providing for repayment by a person
other than the municipal issuer) which are Second Tier Securities are limited
to 5% of the Portfolio's total assets (1% per issuer). The foregoing operating
policies are more restrictive than the fundamental policy set forth in the
Statement of Additional Information.
TAX-EXEMPT CALIFORNIA AND NEW YORK PORTFOLIOS. Pursuant to Rule 2a-7, each
of the Tax-Exempt California and New York Portfolios may not, with respect to
75% of its total assets, invest more than 5% of its total assets (taken at am-
ortized cost) in the securities of any one issuer (except U.S. Government Se-
curities, repurchase agreements collateralized by such securities and certain
securities subject to a guarantee or unconditional demand feature). With re-
spect to 75% of each Portfolio's assets, not more than 10% of such Portfolio's
total assets may be invested in securities issued by or subject to demand fea-
tures or guarantees from the same issuer. Immediately after a Portfolio's ac-
quisition of any demand feature, guarantee or security that (after giving ef-
fect to an associated demand feature or guarantee) is a Second Tier Security,
nor more than 5% of the Portfolio's total assets may be invested in securities
issued by or subject to demand features or guarantees from the issuer of the
acquired Second Tier Security. Each Portfolio's investments in conduit securi-
ties (Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier Securities and limited to 5% of the
Portfolio's total assets (1% per issuer).
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 (except the Tax-Exempt California and
Tax-Exempt New York Portfolios' objectives of providing unitholders with in-
come exempt from California state and New York state and New York city per-
sonal income tax, respectively) cannot be changed without approval of a major-
ity of the outstanding units of that Portfolio. The Treasury Obligations Port-
folio's policy of limiting its investments to U.S. Treasury Obligations and
related repurchase agreements is also fundamental. All investment policies not
specifically designated as fundamental are non-fundamental and may be changed
without unitholder approval.
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
26
<PAGE>
determining and monitoring the liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for
the determinations. Since it is not possible to predict with assurance that
the market for restricted securities eligible for resale under Rule 144A will
continue to be liquid, the Adviser will carefully monitor each Portfolio's in-
vestments in these securities, focusing on such important factors, among oth-
ers, 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.
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, acts as investment adviser to the Portfolios. Goldman
Sachs registered as an investment adviser in 1981. As of March , 1997,
Goldman Sachs, together with its affiliates, acted as investment adviser, ad-
ministrator or distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable 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 each Portfolio's business af-
fairs and performs various unitholder servicing functions to the extent not
provided by other organizations. The management of each Portfolio is subject
to the supervision of the Board of Trustees and that Portfolio's investment
policies. 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 as-
sets as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- --------------
<S> <C> <C>
Prime Obligations Portfolio .35% %
Money Market Portfolio .35% %
Treasury Obligations Portfolio .35% %
Treasury Instruments Portfolio .35% %
Government Portfolio .35% %
Federal Portfolio .35% %
Tax-Exempt Diversified Portfolio .35% %
Tax-Exempt California Portfolio .35% %
Tax-Exempt New York Portfolio .35% %
</TABLE>
27
<PAGE>
The difference, if any, between the stated advisory fee and the actual advi-
sory 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,
taxes, interest, brokerage and litigation, indemnification and other extraor-
dinary expenses) on an annualized basis to .43% of the average daily net as-
sets of the Portfolio less the effect of fee reductions, if any. Such reduc-
tions or limits, if any, are calculated monthly on a cumulative basis. Any
such reductions or limits may be discontinued or modified only with the ex-
press approval of the Trustees. In addition, with respect to the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios, GSAM has voluntarily agreed not to impose all or a portion of its
advisory fee and/or to reduce or otherwise limit each Portfolio's annual total
operating expenses (excluding fees payable to Service Organizations, as de-
fined herein) to . %, . %, . %, . % and . % respectively, of average
daily net assets and for each other Portfolio to .41% of average daily net as-
sets. GSAM has no current intention to but may in the future discontinue or
modify any of such limitations at its discretion.
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. Goldman Sachs also serves as the Transfer
Agent of each Portfolio. For the transfer agency services, Goldman Sachs re-
ceives .04% (on an annualized basis) of the average daily net assets with re-
spect to each 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.
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, (except, in the
case of the Tax-Exempt Portfolios, tax-exempt interest), the excess of net
short-term capital gain over net long-term capital loss and taxable original
issue discount or market discount income will be taxable to unitholders as or-
dinary income. 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 taxable distributions of a Portfolio (in-
cluding a Portfolio that also pays exempt-interest dividends, as described be-
low) 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
28
<PAGE>
December 31 of the year in which they are declared. Unitholders will be in-
formed annually about the amount and character of distributions received from
the Portfolios for federal income tax purposes, including any distributions
that may constitute a return of capital or any distributions of the Tax-Exempt
Portfolios that may constitute a tax preference item under the federal alter-
native minimum tax.
The Tax-Exempt Portfolios intend to satisfy certain requirements of the Code
for the payment of "exempt-interest dividends" not included in unitholders'
federal gross income. The Tax-Exempt California Portfolio and the Tax-Exempt
New York Portfolio also intend to satisfy certain requirements of the Califor-
nia and New York City and State personal income tax laws, respectively, so
that exempt-interest dividends paid by these Portfolios will generally not be
subject to personal income tax of the relevant state (and, in the case of the
Tax-Exempt New York Portfolio, New York City personal income tax). Dividends
paid by a Portfolio from interest on tax-exempt obligations and properly des-
ignated by the Portfolio as exempt-interest dividends, including dividends at-
tributable to exempt-interest dividends received by a Portfolio from other
regulated investment companies, will generally be exempt from federal income
tax, although a portion of such dividends may be subject to the federal alter-
native minimum tax. Exempt-interest dividends will be considered in computing
the "adjusted current earnings" preference item for purposes of the corporate
federal alternative minimum tax, the corporate environmental tax, and the ex-
tent, if any, to which social 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 purchasing units of these Portfolios. Interest incurred to
purchase or carry units of these Portfolios will not be deductible for federal
income tax purposes to the extent related to exempt-interest dividends paid by
the Portfolios and may not be deductible in whole or in part for California or
New York City and State income tax purposes.
Exempt-interest dividends of the Tax-Exempt California and Tax-Exempt New
York Portfolios that are derived from interest on California and New York In-
struments, respectively, will generally not be subject to the personal income
tax of the corresponding state, and in the case of the Tax-Exempt New York
Portfolio, New York City personal income tax. Other distributions will gener-
ally be taxable to unitholders for these state and city tax purposes.
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.
If a Portfolio invests in foreign securities, it may be subject to foreign
withholding or other foreign taxes on income earned on such securities and is
expected to be unable to pass such taxes through to unitholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a unitholder may be subject to state, local or
foreign taxes on payments received from a Portfolio. A state income (and pos-
sibly local income and/or intangible property) tax exemption is generally
available to the extent a Portfolio's distributions are derived from interest
on (or, in the case of intangibles taxes, the value of its assets is attribut-
able to) certain U.S. Government obligations and/or tax-exempt municipal obli-
gations issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Unitholders
should consult their own tax advisers concerning these matters.
29
<PAGE>
NET ASSET VALUE
The net asset value of each Portfolio is determined as of the close of regu-
lar 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 attributable
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 Treasury
Instruments and Federal Portfolios will cease, and each other Portfolio re-
serves the right to cease, accepting purchase and redemption orders for same
Business Day credit at the time the PSA recommends that the securities market
close. On days any Portfolio closes early, purchase and redemption orders re-
ceived after the PSA recommended closing time will be credited to the next
Business Day. In addition, each Portfolio reserves the right to advance the
time by which purchase and redemption orders must be received for same Busi-
ness Day credit as permitted 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 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 relevant 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. In
addition to the above, each Fund may from time to time advertise its perfor-
mance relative to certain rankings or indices. 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 advertisement). This income is then
annualized; that is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed rein-
vestment.
The Tax-Exempt Portfolios and the Federal and Treasury Instruments Portfo-
lios may each also quote tax-equivalent yield. Each 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
(which, in the case of the Tax-Exempt California combines federal and state
taxes, in the case of Tax-Exempt New York Portfolio, combines federal, state
and city taxes, and in the case of the Federal and Treasury Instruments Port-
folios assumes a level of state taxes) of the Portfolio's yield, assuming cer-
tain tax brackets 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 yield, effective yield or tax-equivalent yield for any prior
30
<PAGE>
period should not be considered a representation of what an investment may
earn or what a Portfolio's yield, effective yield or tax-equivalent yield may
be in any future period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately 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 trust, and
were reorganized into the Trust as of May 1, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify units of benefi-
cial interests in separate series, without further action by unitholders. Ad-
ditional 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. The Trustees have authorized the issuance of three classes of units
of each of the Portfolios, which are: ILA Units, ILA Administration Units and
ILA Service Units, except for the Prime Obligations Portfolio which has four
classes of units: ILA Units, ILA Administration Units, ILA Service Units and
ILA Class B Units. (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 by the Trust. In the
event of liquidation, unitholders are entitled to share pro rata in the net
assets of the applicable Portfolio available for distribution to such
unitholders. Units entitle their holders to one vote per unit (but may, at the
discretion of the Trustees, be voted on a net asset value basis), have
noncumulative voting rights, are freely transferable and have no preemptive or
subscription rights.
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 Act, commu-
nicate with other unitholders in connection with requiring a special meeting
of unitholders. The Board of Trustees, however, 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.
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.
As of , 1997, , owned beneficially % of the outstanding
units of Portfolio.
The Trust does not intend to hold annual unitholder meetings, although spe-
cial meetings may be called for such purposes as electing or removing Trust-
ees, complying with a requirement of the Investment Company Act, or such other
purposes as are set forth above. The Trust will facilitate unitholder communi-
cation as required and in the manner prescribed by Section 16(c) of the In-
vestment Company Act.
31
<PAGE>
ADDITIONAL SERVICES
Each Portfolio has adopted a Service Plan with respect to the ILA Service
Units which authorizes it to compensate certain institutions for providing ac-
count administration and personal and account maintenance services to their
customers who are beneficial owners of such Units ("Service Organizations").
Each Portfolio will enter into agreements with Service Organizations which
purchase ILA Service Units, on behalf of their customers ("Service Agree-
ments"). The Service Agreements will provide for compensation to the Service
Organization in an amount up to .40 of 1% (on an annualized basis) of the av-
erage 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; provid-
ed, however, 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. In addition, GSAM, at its
own expense, may pay a Service Organization compensation equal on an annual
basis up to .10 of 1% of the average daily net assets of the ILA Service Units
attributable to or held of record by such Service Organization for providing
certain additional services to its customers. Such compensation will not rep-
resent an additional expense to the Portfolio or its unitholders, since it
will be paid from the assets of GSAM.
For the fiscal year ended December 31, 1996, the Trust, on behalf of the
Prime Obligations, Money Market, Treasury Obligations, Treasury Instruments,
Government, Federal and Tax-Exempt Diversified Portfolios paid Service Organi-
zations 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 (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of ILA Service Units in connec-
tion 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 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.
PURCHASE OF UNITS
It is expected that all direct purchasers of ILA Service Units will be Serv-
ice Organizations or their nominees, which may purchase ILA Service Units of
the Portfolios through Goldman Sachs. Customers of Service Organizations may
invest in such Units only through their Service Organizations.
As set forth below, ILA Service Units of the Portfolios may be purchased on
any Business Day at the net asset value next determined after receipt from the
Service Organization of both the purchase order and the purchase price in Fed-
eral Funds. Purchase orders may be made by telephoning Goldman Sachs at 800-
621-2550 or by a written request addressed to Goldman Sachs, Attention: Share-
holder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606. It is strongly recommended that payment be effected by wiring
32
<PAGE>
Federal Funds to The Northern Trust Company ("Northern"), Chicago, Illinois,
as subcustodian for State Street Bank and Trust Company ("State Street").
Purchases of ILA Service Units may also be made by a Service Organization by
delivering a Federal Reserve draft or check (except that a third party check
will not be accepted) payable only to the appropriate Portfolio and drawn on a
U.S. bank to Goldman Sachs, Attention: Shareholder Services, Goldman Sachs
Trust, 4900 Sears Tower, Chicago, Illinois 60606. It is expected that Federal
Reserve drafts will ordinarily be converted to Federal Funds on the day of re-
ceipt and that checks will be converted to Federal Funds within two Business
Days after receipt. ILA Service Units purchased by check may not be redeemed
until the check has cleared, as described under "Redemption of Units."
Purchases of units of any Portfolio may also be made through an Automated
Clearing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
ILA Service Units of each Portfolio are deemed to have been purchased when
an order becomes effective and are entitled to dividends on ILA Service Units
purchased as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED FROM A
SERVICE
ORGANIZATION BY GOLDMAN SACHS DIVIDENDS BEGIN
----------------------------- -----------------
(1) In the case of the Prime Obligations, Money Market, Treasury Obligations,
Treasury Instruments, Government and Federal Portfolios
<S> <C> <C> <C> <C>
By: 3:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios
By: 1:00 p.m.-N.Y. time Same Business Day
- ---------------------------------------------------------------------------------------
After: 1:00 p.m.-N.Y. time Next Business Day
- ---------------------------------------------------------------------------------------
</TABLE>
The Service Organizations are responsible for timely transmittal of purchase
orders to Goldman Sachs and Federal Funds to Northern. In order to facilitate
timely transmittal, the Service Organizations have established times by which
purchase orders and Federal Funds must be received by them.
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. Goldman Sachs, as each Portfo-
lio's transfer agent, will maintain a complete record of transactions and ILA
Service Units held in each record holder's account. The Trust and Goldman
Sachs each reserves 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, a Service Organization may impose a
minimum amount for initial and subsequent investments in ILA
33
<PAGE>
Service Units of the Portfolios, 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 ren-
dered to its customers. Customers should contact their Service Organization
for further information concerning such requirements and charges. A Service
Organization may purchase ILA Service Units in connection with sweep account
programs.
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. Upon request, a printed confirmation for each transaction
will be provided by Goldman Sachs. Any dividends and distributions paid by the
Portfolios are also reflected in regular statements issued by Goldman Sachs to
unitholders of record. Service Organizations will be responsible for providing
similar services to their own customers who are the beneficial owners of such
Units.
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
to Service Organizations monthly. Distributions will be made in additional ILA
Service Units of the same Portfolio or, at the election of a Service Organiza-
tion, in cash. The election to reinvest dividends and distributions or receive
them in cash may be changed by a Service Organization at any time upon written
notice to Goldman Sachs. If no election is made, all dividends 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 capital 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 Portfolio may distribute
at least annually its long-term capital gains, if any, after reduction by
available capital losses. In order to avoid excessive fluctuations 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 calendar 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.
EXCHANGES
ILA Service Units of each Portfolio may be exchanged by Service Organiza-
tions for units or shares of the corresponding class of any Portfolio or Fund
of Goldman Sachs Trust at the net asset value next determined either by writ-
ing to Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust,
4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman Sachs at
800-621-2550. All telephone exchanges must be regis
34
<PAGE>
tered in the same name(s) and with the same address as are registered in the
Portfolio from which the exchange is being made. It may be difficult to imple-
ment 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. Exchanges
are available only in states where the exchange may legally be made. The ex-
change privilege may be modified or withdrawn at any time on 60 days' written
notice.
REDEMPTION OF UNITS
HOW TO REDEEM
Customers of Service Organizations may redeem ILA Service Units of a Portfo-
lio through their respective Service Organizations. The Service Organizations
are responsible for the transmittal of redemption requests by their customers
to Goldman Sachs. In order to facilitate timely transmittal of redemption re-
quests, Service Organizations have established procedures by which redemption
requests must be made and times by which redemption requests must be received
by them. Additional documentation may be required when deemed appropriate by a
Service Organization.
A Service Organization may redeem such Units without charge upon request on
any Business Day at the net asset value next determined after receipt by
Goldman Sachs of the redemption request. Redemption requests may be made by
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. It may be difficult to implement redemp-
tions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If reasonable procedures are not implement-
ed, the Trust may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, neither the Trust nor Goldman Sachs will be
responsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Portfolios by
means of the check redemption privilege described below. Goldman Sachs re-
serves the right to redeem accounts with balances below $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs by the Service
Organization. The payment of redemption proceeds for ILA Service Units re-
cently purchased by check will be delayed for up to 15 days until the check
has cleared.
35
<PAGE>
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
record holder of ILA Service Units.
<TABLE>
<CAPTION>
REDEMPTION REQUEST REDEMPTION
RECEIVED FROM A SERVICE PROCEEDS
ORGANIZATION BY GOLDMAN SACHS ORDINARILY DIVIDENDS
-------------------------------------------------------------------------
(1) In the case of the Prime Obligations, Money Market, Treasury Obli-
gations, Treasury Instruments, Government and Federal Portfolios
<S> <C> <C> <C>
By: 3:00 p.m.-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- ----------------------------------------------------------------------------
After: 3:00 p.m.-N.Y. time Wired Next Earned on Day
Business request is received
Day
- ----------------------------------------------------------------------------
(2) In the case of the Tax-Exempt Diversified, Tax-Exempt California
and Tax-Exempt New York Portfolios
By: 12:00 noon-N.Y. time Wired Same Not earned on Day
Business request is received
Day
- ----------------------------------------------------------------------------
After: 12:00 noon-N.Y. time Wired Next Earned on Day
Business request is received
Day
- -----------------------------------------------------------------------------
</TABLE>
The Portfolios will arrange for the proceeds of redemptions effected by any
means to be wired as Federal Funds to the Service Organization's bank account
designated in the Account Information Form. Redemption proceeds will normally
be wired as set forth above, but may be paid up to three Business Days after
receipt of the Service Organization's properly executed redemption request.
For example, payment may be delayed if the Federal 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 intermediaries or the ILA Serv-
ice Unitholder's Service Organization in the transfer process. If a problem
with such performance arises, the ILA Service Unitholder should deal directly
with such intermediaries or Service Organization.
CHECK REDEMPTION PRIVILEGE
A Service Organization may elect to have a special account with State Street
for the purpose of redeeming ILA Service Units from its account in that Port-
folio by check. When State Street receives a completed signature card and au-
thorization form, the Service Organization will be provided with 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
fractional ILA Service Units will be redeemed to cover the amount of the
check. Cancelled checks will be returned to the Service Organization by State
Street.
The check redemption privilege enables a Service Organization 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 privi-
lege may not be used for a complete liquidation of an account. If the amount
of a check is greater than the value of ILA Service Units held in the Service
Organization's account, the check will be returned unpaid, and the Service Or-
ganization may be subject to extra charges.
36
<PAGE>
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 Service Organization or all Service Organizations 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.
----------------
37
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
ILA SERVICE UNITS
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unitholder and Portfolio Expenses..........................................
Financial Highlights.......................................................
An Introduction to the Portfolios..........................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Units of the Portfolios...................................
Additional Services........................................................
Purchase of Units..........................................................
Reports to Unitholders.....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Units........................................................
</TABLE>
ILA-1SS-MMT3K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
ILA SERVICE UNITS
------------
PROSPECTUS
------------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS-INSTITUTIONAL LIQUID ASSETS
(PRIME OBLIGATIONS PORTFOLIO)
(TAX-EXEMPT DIVERSIFIED PORTFOLIO)
ILA SERVICE UNITS
ILA CLASS B 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 units of beneficial interest ("ILA Service Units") of the Prime
Obligations and Tax-Exempt Diversified Portfolios (the "Portfolios") and ILA
Class B shares of beneficial interest ("ILA Class B Units") of the Prime
Obligations Portfolio. ILA Class B Units will typically be issued only upon an
exchange of Class B Shares of any mutual fund sponsored by Goldman Sachs which
is subject to a contingent deferred sales charge ("Goldman Sachs Portfolios").
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
MAINTAIN 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 May 1, 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 & Co., 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.
- -------------------------------------------------------------------------------
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 May 1, 1997.
<PAGE>
UNITHOLDER AND PORTFOLIO EXPENSES (NOTE 1)
<TABLE>
<CAPTION>
PRIME OBLIGATIONS TAX-EXEMPT
PORTFOLIO DIVERSIFIED
---------------------------- PORTFOLIO
(ILA SERVICE) (ILA CLASS B+) (ILA SERVICE)
------------- -------------- -------------
<S> <C> <C> <C>
UNITHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases......................... None None None
Sales Charge Imposed on Reinvested
Distributions..................... None None None
Deferred Sales Load Imposed on Re-
demptions......................... None 5.0% None
Exchange Fee....................... None None None
ANNUAL OPERATING EXPENSES
(as a percentage of average daily
net assets)
Management Fees (Note 2) (after ad-
justments)........................ 0.35% 0.35% 0.25%
Distribution (Rule 12b-1) Fees..... None 0.75% None
Other Expenses
Service Fees (Note 3)............. 0.40% None 0.40%
Authorized Dealer Service Fees.... None 0.25% None
Other Expenses (Note 2) (after ex-
pense limitation)................ 0.06% 0.06% 0.06%
---- ---- ----
TOTAL OPERATING EXPENSES (Note 2)... 0.81% 1.41% 0.71%
==== ==== ====
</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 $45 $100
ILA Class B Units......................................
--Assuming complete redemption at end of period....... $64 $75 $97 $147*
--Assuming no redemption.............................. $14 $45 $77 $147
Tax-Exempt Diversified Portfolio
ILA Service Units...................................... $ 7 $23 $40 $ 88
</TABLE>
- -------
Notes:
* ILA Class B Units convert to ILA Service Units eight years after purchase;
therefore, ILA Service Unit expenses are used in the hypothetical example
after year eight.
(1) The purpose of this table is to assist investors in understanding the
various costs and expenses that an investment in the Portfolios will bear
directly or indirectly. Operating expenses for the ILA Class B Units of
the Prime Obligations Portfolio and for ILA Service Units of the
Portfolios are based on actual amounts incurred during the fiscal year
ended December 31, 1996. These expenses are expected to be incurred on an
ongoing basis. The table and hypothetical example should not be considered
a representation of past or future expenses; actual expenses may vary
depending upon a variety of factors including the actual performance of
each Portfolio, which may be greater or less than 5%. See "Management."
(2) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed to
reduce or otherwise limit certain expenses of the Portfolios (excluding
fees payable to Service Organizations, as defined herein, distribution and
authorized dealer service fees, taxes, interest, brokerage and litigation,
indemnification and other extraordinary
2
<PAGE>
expenses), on an annualized basis, to the average daily net assets of each
Portfolio, less the effect of fee reductions, if any, shown in the above
table. The Adviser has also agreed that a portion of its fees will not be
imposed for the Tax-Exempt Diversified Portfolio. Had the reduction of fees
otherwise payable and expense limitations not been reflected in the above
table, the management fees payable by the Tax-Exempt Diversified Portfolio
would be 0.35% of average daily net assets and the amount of other expenses
payable by the Prime Obligations Portfolio and Tax-Exempt Diversified
Portfolio would be 0.08% and 0.07%, respectively, of average daily net
assets. Had the reduction of fees otherwise payable and expense limitations
not been reflected in the above table, the Total Operating Expenses
attributable to ILA Service Units and ILA Class B Units of the Prime
Obligations Portfolio and ILA Service Units of the Tax-Exempt Diversified
Portfolio would be 0.83%, 1.41% and 0.82%, respectively, of average daily
net assets.
(3) Service Organizations, other than Goldman Sachs, may charge other fees to
their customers who are the beneficial owners of ILA Service Units in
connection with their customers' accounts. See "Additional Services." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
+ Investors wishing to purchase Units of the Prime Obligations Portfolio are
generally required to purchase ILA Service Units. ILA Class B Units of the
Prime Obligations Portfolio will typically be issued only in exchange for
Class B Shares of any other Goldman Sachs Portfolio.
The information set forth in the foregoing table and hypothetical example
relates to ILA Service Units of the Prime Obligations Portfolio and Tax-Exempt
Diversified Portfolio and ILA Class B Units of the Prime Obligations Portfo-
lio. The Portfolios also offer ILA Units and ILA Administration Units which
are subject to different fees and expenses (which affect performance), have
different minimum investment requirements and are entitled to different serv-
ices. 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. See "Organization and Units of the Portfo-
lios." Because of the Distribution and Service Plans, long-term unitholders
may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.'s
rules regarding investment companies.
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 , 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.
3
<PAGE>
Goldman Sachs Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- -------------------------------------------------------------------------------
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- -------------------------------------------------------------------------------
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: Not more than ninety days.
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
<TABLE>
<CAPTION>
PRIME OBLIGATIONS PORTFOLIO TAX-EXEMPT DIVERSIFIED PORTFOLIO
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
US Treasury Obligations [_]
- ---------------------------------------------------------------------------------------------
US Government Securities [_]
- ---------------------------------------------------------------------------------------------
Bank Obligations
(Excluding Bank Commercial [_]
Paper) 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 Only Rated
- ---------------------------------------------------------------------------------------------
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* Taxable Federal and Tax-Exempt Federal and Taxable
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.
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Security interest in many states.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
****A Portfolio holding a security fully supported by a guarantee may substi-
tute 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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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 provided that such securities have been rated
by at least one NRSRO. Such asset pools are securitized through the use of
privately-formed trusts or special purpose-corporations. Payments or distribu-
tions 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 is-
sued 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 policies.
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. The Portfolio may temporarily invest in taxable money market instru-
ments 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 look to the creditworthiness of the
party providing unconditional demand features or other unconditional obliga-
tions to support the credit of the issuer of the security. A Portfolio may
consider the maturity of a variable or floating rate Municipal Instrument to
be shorter than its ultimate stated maturity if the Portfolio has the right to
10
<PAGE>
demand prepayment of its principal at specified intervals prior to the
security's ultimate stated maturity, subject to the conditions for using amor-
tized cost valuation under the Investment Company Act. A Portfolio may pur-
chase such variable or floating rate obligations from the issuers or may pur-
chase certificates of participation, a type of floating or variable rate obli-
gation, 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, as permitted by applicable
law, 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 for-
ward 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 se-
curity to be sold increases prior to the settlement date. Although a Portfolio
would generally purchase securities on a when-issued or forward commitment ba-
sis with the intention of acquiring securities for its portfolio, the Portfo-
lio may dispose of a when-issued security or forward commitment prior to set-
tlement if the Adviser deems it appropriate 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 assets in securities of any one investment company or more than
10% of its 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. Goldman Sachs will not im-
pose a portion of the management fees payable by a Portfolio (the "Acquiring
Portfolio") with respect to assets invested in another money market investment
company (the "Acquired Portfolio") as follows. The amount of the management
fees otherwise payable by the Acquiring Portfolio and not imposed by Goldman
Sachs will be equal to the amount of management fees indirectly paid by the
Acquiring Portfolio as a unitholder of the Acquired Portfolio. Such other in-
vestment companies will have investment objectives, policies and restrictions
substantially similar to those of the Acquiring Portfolio and will be subject
to substantially the same risks.
INVESTMENT LIMITATIONS
RULE 2A-7. Pursuant to Rule 2a-7 under the Investment Company Act, each
Portfolio may not invest more than 5% of its assets (taken at amortized cost)
in the securities of any one issuer (except U.S. Government Securities, repur-
chase agreements collateralized by such securities and certain securities sub-
ject to a guarantee). Each Portfolio may, however, invest up to 25% of its to-
tal assets in the First Tier Securities of a single issuer for a period of up
to three business days after the purchase thereof. With respect to 75% of each
Portfolio's assets, not more than 10% of such Portfolio's total assets may be
invested in securities issued by or subject to demand features or guarantees
from the same issuer. The Tax Exempt Diversified Portfolio's investments in
conduit
12
<PAGE>
securities (Municipal Securities providing for repayment by a person other
than the municipal issuer) which are Second Tier Securities are limited to 5%
of the Portfolio's total assets 1% per issuer. The foregoing operating poli-
cies are more restrictive than the fundamental policy set forth in the State-
ment of Additional Information.
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.
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.
13
<PAGE>
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York 10004, a separate operating di-
vision of Goldman Sachs, acts as investment adviser to the Portfolios. Goldman
Sachs registered as an investment adviser in 1981. As of March , 1997,
Goldman Sachs, together with its affiliates, acted as investment adviser, ad-
ministrator or distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment 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 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 Board of Trustees and that Portfolio's invest-
ment policies. 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>
RATE PAID
ANNUAL FOR FISCAL YEAR
RATE ENDED 12/31/96
------ ---------------
<S> <C> <C>
Prime Obligations Portfolio.............................. .35% %
Tax-Exempt Diversified Portfolio......................... .35% %
</TABLE>
The difference, if any, between the stated advisory fee and the actual advi-
sory 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 not to impose all or a portion
of its advisory fee and/or to reduce or otherwise limit the Prime Obligations
and Tax-Exempt Diversified Portfolios' annual total operating expenses (ex-
cluding fees payable to Service Organizations, as defined herein and distribu-
tion and authorized dealer service fees), to % and %, respectively, of aver-
age daily net assets.
14
<PAGE>
GSAM has no current intention to, but may in the future, discontinue or modify
either of the limitations at its discretion.
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 National Association of
Securities Dealers, Inc. and certain other financial service firms that have
sales agreements with Goldman Sachs ("Authorized Dealers"). Goldman Sachs,
4900 Sears Tower, Chicago, Illinois also serves as the Transfer Agent of each
Portfolio. For the transfer agency services, Goldman Sachs receives .04% (on
an annualized basis) of the average daily net assets with respect to each
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.
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 (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of ILA Service Units in connec-
tion 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 an investor's return with respect to an investment in a Portfolio.
15
<PAGE>
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 UNITS ONLY)
DISTRIBUTION PLAN-CLASS B UNITS. Prime Obligations Portfolio, with respect
to its ILA Class B Units, has adopted a Distribution Plan pursuant to Rule
12b-1 under the Investment Company Act (the "Class B Distribution Plan"). Un-
der the Class B Distribution Plan, Goldman Sachs is entitled to a quarterly
fee from the Portfolio for distribution services equal, on an annual basis, to
0.75% of the Portfolio's average daily net assets attributable to its ILA
Class B Units.
Goldman Sachs may use the distribution fee for its expenses of distributing
the ILA Class B Units. The types of expenses for which Goldman Sachs may be
compensated for distribution services under the Class B Distribution Plan in-
clude compensation paid to and expenses incurred by authorized dealers,
Goldman Sachs and their respective officers, employees and sales representa-
tives, commissions paid to authorized dealers, allocable overhead, telephone
and travel expenses, the printing of prospectuses for prospective unitholders,
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 ILA Class B Units. If the fee received by Goldman
Sachs pursuant to the Class B Distribution Plan exceeds its expenses, Goldman
Sachs may realize a profit from these arrangements. The Class B Distribution
Plan will be reviewed and is subject to approval annually by the Board of
Trustees of the Trust. The aggregate compensation that may be received under
the Class B Distribution Plan for distribution services may not exceed the
limitations imposed by the NASD's Conduct Rules.
AUTHORIZED DEALER SERVICE PLAN-CLASS B UNITS. Prime Obligations Portfolio,
with respect to its ILA Class B Units, has adopted a non-Rule 12b-1 Authorized
Dealer Service Plan (an "Authorized Dealer Service Plan") pursuant to which
Goldman Sachs and authorized dealers are compensated for providing personal
and account maintenance services. The Portfolio pays a fee under its Autho-
rized Dealer Service Plan equal on an annual basis to 0.25% of its average
daily net assets attributable to its ILA Class B Units. The fee for personal
and account maintenance services paid pursuant to an Authorized Dealer Service
Plan may be used to make payments to Goldman Sachs, authorized dealers and
their officers, sales representatives and employees for responding to inqui-
ries of, and furnishing assistance to, unitholders regarding ownership of
their units or their accounts or similar services not otherwise provided on
behalf of the Portfolios. The Authorized Dealer Service Plan will be reviewed
and is subject to approval annually by the Board of Trustees.
ALTERNATIVE PURCHASE ARRANGEMENTS
Each Portfolio continuously offers ILA Service Units and the Prime Obliga-
tions Portfolio also offers ILA Class B Units through this prospectus, as de-
scribed more fully below. ILA Class B Units of the Prime Obligations Portfolio
will be typically issued only upon an exchange of Class B Shares of any of the
Goldman Sachs Portfolios, as defined herein. If an investor does not specify
in the instructions to the Portfolios which class of Units an investor wishes
to purchase, exchange or redeem, the Portfolios will assume that the instruc-
tions apply to ILA Service Units, since such units are not subject to any con-
tingent 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 of the Prime Obligations Portfolio are typically intended to be pur-
chased only in connection with exchanges of Class B Shares of any other
Goldman Sachs Portfolio. ILA Class B Units are sold without an initial sales
charge, but are subject to a contingent deferred sales charge ("CDSC"), as de-
scribed 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 attribut-
able 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 imposed upon exchanges between the Prime Ob-
ligations Portfolio and another Goldman Sachs Portfolio. 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 ac-
quired 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.
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.
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.
17
<PAGE>
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 Portfolio will convert into ILA Serv-
ice Units based on the date of the initial purchase. ILA Class B Units ac-
quired through reinvestment of distributions will convert into ILA Service
Units based on the date of the initial purchase of the units on which the dis-
tribution was paid.
Waiver or Reduction of Contingent Deferred Sales Charge. The CDSC on ILA
Class B units may be waived or reduced if the redemption relates to (a) re-
tirement 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 withdraw-
als by a participant or beneficiary in a Plan; (d) satisfying the minimum dis-
tribution 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 Portfolios 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 and ILA Class B 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 pur-
chase 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" ac-
count, the applicable Authorized Dealer. Since the Portfolios and Goldman
Sachs will have no record of the beneficial owner's transactions 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 dealers who perform administrative services with respect to
depository institutions whose customers purchase ILA Service Units of the
Portfolios. These services 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 conduct a mutual fund sales program; acting as liaison
between depository institutions and national regulatory organizations; assist-
ing 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. The amount of such compensation may be up
to .08% annually of the average net assets of each Portfolio attributable to
ILA Service Units purchased through, and held by the customers of, such depos-
itory institutions. Such compensation does not represent an additional expense
to any Portfolio or its unitholders, since it will be paid from the assets of
Goldman Sachs or its affiliates.
PURCHASES BY CHECK
Initial purchases of ILA Service Units and ILA Class B Units may be made by
mailing a completed Account Application along with a Federal Reserve draft or
check (except that a third party check will not be accepted)
18
<PAGE>
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 ac-
count number to Goldman Sachs Trust (Prime Obligations Portfolio--Indicate
Class of Units) or (Tax-Exempt Diversified Portfolio--Service Units) Service
Units, c/o NFDS, P.O. Box 419711, Kansas City, MO 64141-6711. The order be-
comes 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 Fed-
eral Funds within two Business Days after receipt. Payment of redemption pro-
ceeds from ILA Service Units and ILA Class B Units purchased by check may be
delayed up to 15 days until the check has cleared, as described under "Redemp-
tion of Units".
AUTOMATIC INVESTMENT PLAN
Systematic cash investments in ILA Service Units or ILA Class B Units may be
made through a unitholder's bank via the Automated Clearing House Network or a
unitholder's checking account via bank draft each month. Required forms are
available from Goldman Sachs or any Authorized Dealer. A minimum investment of
$50 is required for Automatic Investment Plans.
PURCHASES
ILA Service Units and ILA Class B Units of the Prime Obligations Portfolio
are deemed to have been purchased when an order becomes effective and are en-
titled 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 Units acquired
through an exchange will be purchased at the net asset value per unit and will
only be subject to the CDSC of the shares originally held. For purposes of de-
termining the amount of any applicable CDSC, the length of time a unitholder
has owned ILA Class B Units will be measured from the date the unitholder ac-
quired the original Class B shares and will not be affected by any subsequent
exchange. Investors should consult their Goldman Sachs Portfolio Class B
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 or ILA Class B Units held in each
unitholder's account. The Trust and Goldman Sachs each reserves the right to
reject any purchase order for any reason.
19
<PAGE>
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 $10,000. Shareholders of any Goldman Sachs
Portfolio who wish to purchase ILA Service Units of the Portfolios or ILA
Class B Units of the Prime Obligations Portfolio through an exchange of shares
of such a Goldman Sachs Portfolio may be subject to different minimum invest-
ment requirements. (See "Exchanges," on page 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 and defined contribution plans such as 401(k) Salary Reduc-
tion Plans.
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. Under all plans,
dividends and distributions will be automatically reinvested in additional
units of the Portfolio or, if so directed by the unitholder, in cash, or in
shares of another Goldman Sachs Portfolio.
The minimum initial investment for all such retirement plans is $10,000, ex-
cept for certain exchanges of shares of any Goldman Sachs Portfolio and except
that the minimum for tax-sheltered retirement plans is $250. There is a mini-
mum 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 Units of the Prime Obli-
gations 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 responsi-
ble for providing similar services to their own customers who are the benefi-
cial owners of such Units.
20
<PAGE>
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 or ILA
Class B Units of the same Portfolio or, at the election of a Service Organiza-
tion (with respect to ILA Service Units) or ILA Class B Unitholders, 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 Serv-
ice Organization or ILA Class B 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 capital gains, if any, will be distributed in ac-
cordance with the requirements of the Code and may be reflected in a Portfo-
lio's daily distributions. Each Portfolio may distribute at least annually its
long-term capital gains, if any, after reduction by available capital losses.
In order to avoid excessive fluctuations in the amount of monthly capital
gains distributions, a portion of any net capital gains realized on the dispo-
sition of securities during the months of November and December may be dis-
tributed during the subsequent calendar 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.
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
21
<PAGE>
the Tax-Exempt Diversified Portfolio that may constitute a tax preference item
under the federal alternative 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 may not be deductible for federal or state income tax purposes.
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 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 municipal obliga-
tions issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings 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 or ILA Class B
Units for corresponding shares of any Goldman Sachs Portfolio. In the case of
ILA Service Units, such exchanges will be made into the relevant Goldman Sachs
Portfolio 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 auto-
matic exchanges will be made at net asset value. In the case of ILA Class B
Unitholders, such exchanges will be made into the relevant Goldman Sachs Port-
folio 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 Units will be measured
from the date the unitholder acquired the original Class B shares and will not
be affected by any subsequent exchange. Investors should consult their Goldman
Sachs Portfolio Class B shares prospectus to determine the amount of their ap-
plicable CDSC. Dividends and/or capital gains of ILA Service Units of each
22
<PAGE>
Portfolio and ILA Class B Units of the Prime Obligations Portfolio which have
been reinvested may be exchanged for corresponding shares of a Goldman Sachs
Portfolio 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 minimum 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 $10,000 and (ii) the
value of the account in the acquired fund must equal or exceed the acquired
fund's minimum initial investment requirement or, 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 Portfolio
and its shares and consider its investment objective, policies and applicable
fees and expenses before electing an automatic exchange into that Goldman
Sachs Portfolio.
EXCHANGES
ILA Service Units of each Portfolio and ILA Class B Units of the Prime Obli-
gations Portfolio may be exchanged for units of the corresponding class of any
Goldman Sachs Portfolio. A unitholder should obtain and read the prospectus
for the relevant Goldman Sachs Portfolio 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 Portfolio at the public offering price, which may include a sales
charge, unless a sales charge has previously been paid on the investment rep-
resented by the exchanged units (i.e., the units to be exchanged were origi-
nally issued in exchange for shares on which a sales charge was paid), in
which case the exchange will be made at net asset value. In the case of ILA
Class B Unitholders, such exchanges will be made into the relevant Goldman
Sachs Portfolio 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 Units will be mea-
sured from the date the unitholder acquired the original Class B shares and
will not be affected by any subsequent exchange. Investors should consult
their Goldman Sachs Portfolio Class B shares prospectus to determine the
amount of their applicable CDSC. ILA Service Units of each Portfolio or ILA
Class B Units of the Prime Obligations Portfolio purchased through dividend
and/or capital gains reinvestment may be exchanged for corresponding shares of
a Goldman Sachs Portfolio without an initial sales charge or CDSC.
ILA Service Units of a Portfolio acquired in an exchange transaction for
shares of a Goldman Sachs Portfolio will be subject to the CDSC, if any, of
the shares of the Goldman Sachs Portfolio originally held. For purposes of de-
termining the amount of any applicable CDSC, the length of time a unitholder
had owned units acquired will be measured from the date the unitholder ac-
quired 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 exchange transaction for shares of a Goldman Sachs Portfolio 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,
if previously elected on the Account Application, by telephone at 1-800-526-
7384 (9:00 a.m. to 4:00 p.m. New York time). Under the telephone exchange
privilege,
23
<PAGE>
units may be exchanged among accounts with different names, addresses or so-
cial 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 "Redemption of Units."
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 Portfolio into which the shares or units are
being exchanged. The minimum initial exchange for shareholders of a Goldman
Sachs Portfolio is $10,000 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 Portfolio. Ex-
changes are available only in states where the exchange may be legally made.
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 Units of the Prime Obligations Portfolio 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 appli-
cable CDSC. Investors should consult their Goldman Sachs Portfolio Class B
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 Authorized Dealer.
Written requests may be addressed to Goldman Sachs Trust, c/o NFDS, P.O. Box
419711, Kansas City, MO 64141-6711. A unitholder may request redemptions by
telephone. 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 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 may 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. [In all other cases, neither the Portfolios, the
Trust nor Goldman Sachs will be responsible for the authenticity of
instructions received by telephone.] Proceeds of telephone redemptions
24
<PAGE>
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.
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.
- -------------------------------------------------------------------------------
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 or ILA Class B Units.
<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
25
<PAGE>
Organization in the transfer process. If a problem with such performance aris-
es, the customer should deal directly with such intermediaries or Service Or-
ganization.
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.
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
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 attributable
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 Statement. There
can be no assurance that a Portfolio will be able at all times to maintain a
net asset value per unit of $1.00.
26
<PAGE>
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 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. In
addition to the above, each Portfolio may from time to time advertise its per-
formance relative to certain rankings or indicies. 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 advertisement). This income is
then annualized; that is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period
and is shown as a percentage of the investment. The effective yield is calcu-
lated similarly but, when annualized, the income earned by an investment in
the Portfolio is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this as-
sumed 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 yield, effective yield or tax-equivalent yield for any prior pe-
riod should not be considered a representation of what an investment may earn
or what a Portfolio's yield, effective yield or tax-equivalent yield may be in
any future period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately 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 Portfolios were
formerly series of Goldman Sachs Money Market Trust, a Massachusetts trust and
were reorganized into the Trust as of May 1, 1997. The Trustees have authority
under the Trust's Declaration of Trust to create and classify units of benefi-
cial interest in separate series, without further action by unitholders. Addi-
tional series may be added in the future. The Trustees also have authority to
classify or reclassify any series or portfolio of into one or more classes.
The Trustees have authorized the issuance of three classes of the Tax-Exempt
Diversified Portfolio and four classes of units of the Prime Obligations Port-
folio, which are: ILA Units, ILA Administration and ILA Service and in the
case of the Prime Obligations Portfolio, ILA Class B.
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 unitholders. Units entitle
their holders to one vote per unit (but may, at the discretion of the Trust-
ees, be voted on a net asset value basis), have noncumulative voting rights
are freely transferable and have no preemptive or subscription rights.
27
<PAGE>
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 Act, commu-
nicate with other unitholders in connection with requiring a special meeting
of unitholders. The Board of Trustees, however, 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.
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.
The Trust does not intend to hold annual unitholder meetings, although spe-
cial meetings may be called for such purposes as electing or removing Trust-
ees, complying with a requirement of the Investment Company Act, or such other
purposes as are set forth above. The Trust will facilitate unitholder communi-
cation as required and in the manner prescribed by Section 16(c) of the In-
vestment Company Act.
28
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
ILA SERVICE UNITS
ILA CLASS B 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........................................................ 7
Description of Securities and Investment
Techniques................................................................ 8
Investment Limitations..................................................... 12
Management................................................................. 14
Additional Services........................................................ 15
Service Plan.............................................................. 15
Distribution and Authorized Dealer
Service Plans............................................................ 16
Alternative Purchase Arrangements......................................... 16
Reports to Unitholders..................................................... 20
Distributions and Taxes.................................................... 21
Automatic Exchange Program................................................. 22
Exchanges.................................................................. 23
Redemption of Units........................................................ 24
Net Asset Value............................................................ 26
Yield Information.......................................................... 27
Organization and Units of the Portfolios................................... 27
</TABLE>
ILA-RET-MMT6K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS TRUST
GOLDMAN SACHS-- INSTITUTIONAL LIQUID ASSETS
PRIME OBLIGATIONS PORTFOLIO
TAX-EXEMPT DIVERSIFIED PORTFOLIO
-----------
PROSPECTUS
-----------
ILA SERVICE UNITS
ILA CLASS B UNITS
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST SHARES
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management invest-
ment company (a "mutual fund") which includes the Financial Square Funds (the
"Funds"). This Prospectus relates only to the offering of FST shares of bene-
ficial interest ("FST Shares") of the Funds. Goldman Sachs Asset Management, a
separate operating division of Goldman, Sachs & Co., serves as each Fund's in-
vestment adviser. Goldman, Sachs & Co. serves as each Fund's distributor and
transfer agent.
The following Funds seek 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 Funds may invest in
diversified portfolios of the following types of instruments:
Financial Square Prime Obligations Fund. 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.
Financial Square Money Market Fund. Securities of the U.S. Government, its
agencies, authorities and instrumentalities, U.S. dollar denominated obliga-
tions of U.S. and foreign banks, U.S. dollar denominated commercial paper and
other short-term obligations of U.S. and foreign companies, foreign govern-
ments, states, municipalities and other entities, and repurchase agreements.
Financial Square Money Market Plus Fund. Securities of the U.S. Government,
its agencies, authorities and instrumentalities, U.S. dollar denominated obli-
gations of U.S. and foreign banks, U.S. dollar denominated commercial paper
and other short-term obligations of U.S. and foreign companies, foreign gov-
ernments, states, municipalities and other entities, and repurchase agree-
ments. In order to obtain a rating from a rating organization, the Fund will
observe special investment restrictions.
Financial Square Treasury Obligations Fund. Securities issued or guaranteed
by the U.S. Treasury and repurchase agreements relating to such securities.
Financial Square Treasury Instruments Fund. Securities issued or guaranteed
by the U.S. Treasury.
Financial Square Government Fund. Securities of the U.S. Government, its
agencies, authorities, and instrumentalities, and repurchase agreements relat-
ing to such securities.
Financial Square Federal Fund. Securities of the U.S. Government and certain
of its agencies, authorities and instrumentalities, the interest income from
which is generally exempt from state income taxation.
Financial Square Tax-Free Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes and
not an item of tax preference under the federal alternative minimum tax.
Financial Square Municipal Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes (but
not necessarily exempt from federal alternative minimum tax or state and local
taxes).
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT AND THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION.... Goldman Sachs Mutual Funds--Toll Free: 800-621-2550
This Prospectus provides you with information about the Funds that you should
know before investing in FST Shares. It should be read and retained for future
reference. If you would like more detailed information, the Statement of Addi-
tional Information dated May 1, 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 & Co., 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 Ex-
change Commission. Not all Funds are available in certain states. Please call
the phone number listed above to determine availability in your state.
- -------------------------------------------------------------------------------
FST 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 IN-
SURED 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
SHAREHOLDER AND FUND EXPENSES (NOTE 1)
FST SHARES (NOTE 2)
<TABLE>
<CAPTION>
FINANCIAL FINANCIAL FINANCIAL
FINANCIAL FINANCIAL SQUARE FINANCIAL FINANCIAL SQUARE SQUARE
SQUARE SQUARE MONEY SQUARE SQUARE FINANCIAL FINANCIAL TAX-FREE MUNICIPAL
PRIME MONEY MARKET TREASURY TREASURY SQUARE SQUARE MONEY MONEY
OBLIGATIONS MARKET PLUS OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND FUND FUND
----------- --------- --------- ----------- ----------- ---------- --------- --------- ---------
<S> <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
Sales Charge Imposed
on Reinvested
Distributions....... None None None None None None None None None
Deferred Sales Load
Imposed on
Redemptions......... None None None None None None None None None
Exchange Fee......... None None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees (Note
3) (after
adjustments)........ 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17%
Other Expenses
(after expense
limitations)
(Note 3)............ 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING EX-
PENSES (Note 3)...... 0.18% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18% 0.18%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
EXAMPLE OF EXPENSES
You would pay the following expenses on a hypothetical $1,000 investment, as-
suming a 5% annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Financial Square Prime Obligations Fund..... $ $ $ $
Financial Square Money Market Fund.......... $ $ $ $
Financial Square Money Market Plus Fund..... $ $
Financial Square Treasury Obligations Fund.. $ $ $ $
Financial Square Treasury Instruments Fund.. $ $
Financial Square Government Fund............ $ $ $ $
Financial Square Federal Fund............... $ $
Financial Square Tax-Free Money Market Fund. $ $ $ $
Financial Square Municipal Money Market
Fund....................................... $ $
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the var-
ious costs and expenses that an investment in the Funds will bear directly
or indirectly. Operating expenses for Financial Square Money Market Plus
Fund, Financial Square Municipal Money Market Fund, Financial Square Fed-
eral Fund and Financial Square Treasury Instruments Fund are based on es-
timates of expenses expected to be incurred during the fiscal year ending
December 31, 1997. Operating expenses for the other Funds are based on ac-
tual amounts incurred during the fiscal year ended December 31, 1996.
These expenses are expected to be incurred on an ongoing basis. The table
and hypothetical example should not be considered a representation of past
or future expenses; actual expenses may vary depending upon a variety of
factors including the actual performance of each Fund, which may be
greater or less than 5%. See "Management."
(2) The information set forth in the foregoing table and example relates only
to FST Shares of the Funds. The Funds also offer FST Preferred Shares, FST
Administration Shares and FST Service Shares which are subject to differ-
ent fees and expenses (which affect performance), have different minimum
investment requirements and are entitled to different services. Informa-
tion regarding any other class of the Funds may be obtained from your
sales representative or from Goldman Sachs by calling the number on the
front cover of this Prospectus. See "Organization and Shares of the
Trust."
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed that a
portion of its fee will not be imposed. In addition, the Adviser has
agreed to reduce or otherwise limit certain expenses of each Fund (exclud-
ing fees payable to Service Organizations, as defined herein, taxes, in-
terest and brokerage and litigation, indemnification and other extraordi-
nary expenses), on an annualized basis, to .18% of such Fund's average
daily net assets. The following table sets forth the expenses payable by
each Fund not reflecting the reduction of fees otherwise payable and any
expense limitations:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------
<S> <C> <C> <C>
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% % %
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a share (of the class specified) of the
Financial Square Prime Obligations, Financial Square Money Market, Financial
Square Treasury Obligations, Financial Square Government and Financial Square
Tax-Free Money Market Funds outstanding during the periods indicated have been
audited by independent auditors, as indicated in their report incorpo-
rated by reference and attached to the Statement of Additional Information
from the annual report to shareholders for the fiscal year ended December 31,
1996 (the "Annual Report"), and should be read in conjunction with the finan-
cial statements and related notes incorporated by reference and attached to
the Statement of Additional Information.
Financial Square Municipal Money Market, Financial Square Money Market Plus,
Financial Square Federal and Financial Square Treasury Instruments Funds had
no operations during the fiscal year ended December 31, 1996. Accordingly,
there are no selected per share data and ratios presented for these Funds.
4
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- -------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- -------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- -------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- -------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
9
<PAGE>
AN INTRODUCTION TO THE FUNDS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment Company Act"). Each Fund 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 Funds' investment ad-
viser (the "Adviser" or "GSAM").
THE DISTRIBUTOR: Goldman Sachs, which serves as the Funds' distributor and
transfer agent, is one of the largest international investment banking and
brokerage firms in the United States.
THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value and convenient liquidation priv-
ileges. The Funds are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers. Shares of the Government Fund
are intended to qualify as eligible investments for Federally chartered credit
unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit
Union Act, Part 703 of the National Credit Union Administration ("NCUA") Rules
and Regulations and NCUA Letter Number 155. The Fund intends to review changes
in the applicable laws, rules and regulations governing eligible investments
for federally chartered credit unions, and to take such action as may be nec-
essary so that the investments of the Fund qualify as eligible investments un-
der the Federal Credit Union Act and the regulations thereunder. Shares of the
Government Fund, however, may or may not qualify as eligible investments for
particular state chartered credit unions. State chartered credit unions should
consult qualified legal counsel to determine whether the Government Fund is a
permissible investment under the law applicable to it.
THE FUNDS: Each Fund'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 Fund may invest only in securities that are de-
termined to present minimal credit risk and meet certain other criteria.
TAXABLE FUNDS: Prime Obligations, Money Market, Money Market Plus, Trea-
sury Obligations, Government, Treasury Instruments and Federal Funds.
TAX-EXEMPT FUNDS: Tax-Free Money Market and Municipal Money Market Funds.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE FUNDS AND TAX-EXEMPT
FUNDS: To maximize current income to the extent consistent with the preser-
vation of capital and the maintenance of liquidity by investing exclusively
in high quality money market instruments. In order to obtain a rating from
a rating organization, the Money Market Plus Fund will observe special in-
vestment restrictions. The Treasury Instruments and Federal Funds pursue
their objectives by limiting their investments to certain U.S. Treasury Ob-
ligations and U.S. Government Securities (each as defined herein), respec-
tively, the interest from which is generally exempt from state income taxa-
tion. Each investor should consult his or her tax adviser to determine
whether distributions from the Treasury Instruments and Federal Funds (and
any other Fund that may hold such obligations) derived from interest on
such obligations are exempt from state income taxation in the investor's
own state.
NET ASSET VALUE: Each Fund seeks to maintain a stable net asset value of
$1.00 per share.
MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: Thirteen months at the
time of purchase.
10
<PAGE>
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY: Not more than ninety days.
FIRST TIER SECURITIES: Each Fund 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, comparable 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 defined herein
are considered First Tier Securities.
SECOND TIER SECURITIES: The Tax-Exempt Funds 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 Taxable Funds 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 Fund may purchase Second Tier Securities,
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.
11
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED & FOREIGN
US US OBLIGATIONS CORPORATIONS RECEIVABLES- GOVERNMENT
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED OBLIGATIONS
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES (US$)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Obligations US Banks US Rated
Fund Only Entities Only
Only
- -----------------------------------------------------------------------------------------------------------------------------
Money Market [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Fund Over 25% of US and US and Rated
total assets Foreign Foreign Only
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Money Market
Plus Fund [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Over 25% of US and US and
total assets Foreign Foreign
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [ ] [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Government Fund [ ] [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Municipal Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Federal Fund [ ] [ ] [ ]
(Does
not
intend
to
invest)
</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.
12
<PAGE>
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED SUMMARY OF
MUNICIPALS MUNICIPAL QUALITY**** COMPANIES SECURITIES TAXATION* MISCELLANEOUS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] First [ ] [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May (but does
At least 80% of Second Up to 10% of Federal and not currently
net assets in Tier total assets Taxable intend to)
Municipal in other State*** invest up to 20%
Instruments investment in AMT
(except in companies securities and
extraordinary may temporarily
circumstances) invest in the
taxable money
market
instruments
described herein
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May invest up to
At least 80% of Second Up to 10% of Federal and 100% in AMT
net assets in Tier total assets Taxable securities and
Municipal in other State*** may temporarily
Instruments investment invest in the
(except in companies taxable money
extraordinary market
circumstances) instruments
described herein
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable Under
Tier Up to 10% of Federal and extraordinary
total assets generally circumstances,
in other exempt from may hold cash,
investment state taxation U.S. Government
companies Securities
subject to state
taxation or cash
equivalents
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets generally
in other exempt from
investment state taxation
companies
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Securities interest in many states.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
**** A Fund holding a security fully supported by a guarantee may substitute
the credit quality of the guarantee in determining the credit quality of
the security.
13
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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 Fund may also invest in separately traded principal and interest compo-
nents of securities guaranteed or issued by the U.S. Treasury if such compo-
nents are traded independently under the Separate Trading of Registered Inter-
est and Principal of Securities program ("STRIPS").
The Treasury Instruments and Federal Funds invest in U.S. Treasury Obliga-
tions and certain U.S. Government Securities (including U.S. Treasury Obliga-
tions), respectively, the interest from which is generally exempt from state
income taxation. Securities generally eligible for this exemption include
those issued by the U.S. Treasury and those issued by certain agencies, au-
thorities or instrumentalities of the U.S. Government, including the Federal
Home Loan Banks, Federal Farm Credit Banks, Tennessee Valley Authority and the
Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may also acquire securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities 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. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "U.S. Bank Obligations" limited to securities issued or guaranteed by U.S.
banks (including certificates of deposit, commercial
14
<PAGE>
paper, unsecured bank promissory notes and bankers' acceptances) which have
more than $1 billion in total assets at the time of purchase. Such obligations
may also include debt obligations issued by U.S. subsidiaries of such banks.
The Money Market and Money Market Plus Funds may also invest in "Foreign
Bank Obligations" limited to U.S. dollar denominated obligations issued or
guaranteed (including fixed time deposits) by foreign banks which have more
than $1 billion in total assets at the time of purchase, U.S. branches of such
foreign banks (Yankee obligations), foreign branches of such foreign banks and
foreign branches of U.S. banks having more than $1 billion in total assets at
the time of purchase. Such bank obligations may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the spe-
cific obligations or by government regulation.
The Money Market and Money Market Plus Funds will invest more than 25% of
their total assets in bank obligations (whether foreign or domestic). However,
if adverse economic conditions prevail in the banking industry (such as sub-
stantial losses on loans, increases in non-performing assets and charge-offs
and declines in total deposits) the Funds may, for defensive purposes, tempo-
rarily invest less than 25% of their total assets in bank obligations. As a
result, the Funds may be especially affected by favorable and adverse develop-
ments in or related to the banking industry. The activities of U.S. banks and
most foreign banks are subject to comprehensive regulations which, in the case
of U.S. regulations, have undergone substantial changes in the past decade.
The enactment of new legislation or regulations, as well as changes in inter-
pretation and enforcement of current laws, may affect the manner of operations
and profitability of domestic and foreign banks. Significant developments in
the U.S. banking industry have included deregulation of interest rates, in-
creased competition from other types of financial institutions, increased ac-
quisition activity, geographic expansion and, during the late 1980's, an in-
creased number of bank failures. Banks may be particularly susceptible to cer-
tain economic factors, such as interest rate changes and adverse developments
in the market for real estate. Fiscal and monetary policy and general economic
cycles can affect the availability and cost of funds, loan demand and asset
quality and thereby impact the earnings and financial conditions of banks. See
"Foreign Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Commercial Paper" (including variable amount master demand notes and as-
set-backed commercial paper) which is payable in U.S. dollars and is issued or
guaranteed by U.S. corporations, U.S. commercial banks, foreign corporations
(Money Market and Money Market Plus Funds only), foreign commercial banks
(Money Market and Money Market Plus Funds only) or other entities. In addi-
tion, the Funds 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, foreign corporations (Money Market and Money Market Plus
Funds only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Asset-Backed and Receivables-Backed Securities" which represent participa-
tions in, or are secured by and payable from, pools of assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of var-
ious types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. Such asset pools are
securitized through the use of privately-formed trusts or special purpose cor-
porations. Payments or distributions of principal
15
<PAGE>
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. To the extent con-
sistent with its investment objectives and policies, each of the Prime Obliga-
tions, Money Market and Money Market Plus Funds may invest in new types of
mortgage-related securities and in other asset-backed securities that may be
developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market and Money Market Plus Funds may invest in U.S. dollar de-
nominated obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government or any entity located or organized coun-
tries that maintain a short-term foreign currency rating in the highest short-
term rating categories by at least 2 NRSROs, or if unrated, deemed to be
equivalent by the Trustees. The Money Market and Money Market Plus Funds may
not invest more than 25% of their total assets in the securities of any one
foreign government.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
TYPES OF MUNICIPAL INSTRUMENTS:
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET AND
MUNICIPAL MONEY MARKET FUNDS
-------------------------------------------------------------------------
<S> <C>
FIXED RATE NOTES AND SIMILAR In highest short-term or one of the
DEBT INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
VARIABLE AND FLOATING RATE In highest short-term or one of the
DEMAND INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER In highest rating category
-------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two highest rating
categories
-------------------------------------------------------------------------
UNRATED NOTES, PAPER, BONDS AND Determined to be of comparable quality
OTHER INSTRUMENTS by Adviser pursuant to criteria
approved by the Trustees
</TABLE>
16
<PAGE>
As a matter of fundamental policy, at least 80% of each of the Tax-Free
Money Market and Municipal Money Market Fund's net assets will ordinarily be
invested in Municipal Instruments. Each Tax-Exempt Fund 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 each
Tax-Exempt Fund. The Prime Obligations, Money Market and Money Market Plus
Funds may invest in short-term obligations issued or guaranteed by state and
municipal governments when yields on such securities are attractive compared
to other taxable investments.
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 Fund's average portfolio maturity. There is a risk
that a Fund will not be considered the owner of a tender option bond for fed-
eral 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 Funds to sell them at
par value plus accrued interest
17
<PAGE>
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 consider-
ing whether an obligation meets a Fund's quality standards, the Fund will look
to the creditworthiness of the party providing unconditional demand features
or other unconditional obligations to support the credit of the issuer of the
security. A Fund may consider the maturity of a variable or floating rate Mu-
nicipal Instrument to be shorter than its ultimate stated maturity if the Fund
has the right to demand prepayment of its principal at specified intervals
prior to the security's ultimate stated maturity, subject to the conditions
for using amortized cost valuation under the Investment Company Act. A Fund
may purchase such variable or floating rate obligations 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 Funds (other than the Treasury Obliga-
tions, Treasury Instruments, Government and Federal Funds) may invest in in-
dustrial development bonds (generally referred to under current tax law as
"private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to shareholders un-
der the federal alternative minimum tax. See "Taxes" and "Distributions." Mu-
nicipal Fund may invest up to 100% of its assets in private activity bonds.
Tax-Free Fund does not currently intend to invest in such bonds. If Tax-Free
Fund's policy not to invest in private activity bonds should change in the fu-
ture, shareholders would be notified and such investments would not exceed 20%
of Tax-Free Fund's net assets.
OTHER POLICIES. Ordinarily the Tax-Exempt Funds expect that 100% of their
portfolio securities will be Municipal Instruments. However, the Funds may
hold cash or invest in short-term taxable securities as set forth above. Such
Funds may invest 25% or more of the value of their respective total assets in
Municipal Instruments which are related in such a way that an economic, busi-
ness or political development or change affecting one Municipal Instrument
would also affect the other Municipal Instruments. For example, the Tax Exempt
Funds may invest all of their respective assets in (a) Municipal Instruments
the interest on which is paid solely from revenues from similar projects such
as hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies or life care facili-
ties, (b) Municipal Instruments whose issuers are in the same state or (c) in-
dustrial development obligations. Concentration of a Fund's investments in
these Municipal Instruments will subject the Fund, 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 Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may purchase Municipal Instruments which are backed
by letters of credit, which will ordinarily be irrevocable, issued by domestic
banks or foreign banks (excluding Prime Obligations Fund) which have a branch,
agency or subsidiary in the United States. In addition, these Funds may ac-
quire securities in the form of custodial receipts which evidence ownership 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 Fund (other than the Treasury Obligations, Treasury Instru-
ments, Government and Federal Funds) may acquire the right to sell the secu-
rity to another party at a guaranteed price and date.
18
<PAGE>
REPURCHASE AGREEMENTS
Each Fund (other than the Treasury Instruments Fund) may only enter into re-
purchase agreements with primary dealers. A repurchase agreement is an agree-
ment under which a Fund purchases securities and the seller agrees to repur-
chase the securities within a particular time at a specified price. Such price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. A
Fund's custodian or sub-custodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure 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. In evaluat-
ing 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 repurchase
agreements entered into by a Fund will be taxable to its shareholders. In ad-
dition, each Fund, 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 bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase when-issued securities and make contracts to purchase
or sell securities for a fixed price at a future date beyond customary settle-
ment time. A Fund is required to hold and maintain in a segregated account
with the Fund's custodian or sub-custodian until three days prior to settle-
ment date, cash or liquid assets, as permitted by applicable law 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 in-
volve 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 in-
creases 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, the Fund may dispose of a when-issued
security or forward commitment prior to settlement if the Adviser deems it ap-
propriate 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 each Fund'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 Fund acquiring more than 3% of the voting shares of any other
investment company and a prohibition on investing more than 5% of a Fund's as-
sets in securities of any one investment company or more than 10% of its as-
sets in securities of all investment companies. Each Fund will indirectly bear
its proportionate share of any management fees and other expenses paid by such
other investment companies. Goldman Sachs will not impose a portion of the
management fees payable by a Fund (the "Acquiring Fund") with respect to as-
sets invested in another money market investment company (the "Acquired Fund")
as follows. The amount of the management fees otherwise payable by the Acquir-
ing Fund and not imposed by Goldman Sachs will be equal to the amount of man-
agement fees indirectly paid by the Acquiring Fund as a shareholder of the Ac-
quired Fund. Such other investment companies will have investment objectives,
policies and restrictions substantially similar to those of the Acquiring Fund
and will be subject to substantially the same risks.
19
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT FUNDS. Pursuant to Rule 2a-7 under the Investment
Company Act, each Taxable Fund and Tax-Exempt Fund may not invest more than 5%
of its total assets (taken at amortized cost) in the securities of any one is-
suer (except U.S. Government Securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee). Each of
such Funds 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. With respect to 75% of each Fund's assets, not
more than 10% of such Fund's total assets may be invested in securities issued
by or subject to demand features or guarantees from the same issuer. A
Tax-Exempt Funds investment in conduit securities (Municipal Securities pro-
viding for repayment by a person other than the municipal issuer) which are
Second Tier securities are limited to 5% of the Fund's total assets (1% per
issuer). The foregoing operating policies are more restrictive than the funda-
mental policy set forth in the Statement of Additional Information.
INVESTMENT RESTRICTIONS. Each Fund is subject to certain investment restric-
tions that are described in detail under "Investment Restrictions" in the
Statement of Additional Information. Fundamental investment restrictions of a
Fund cannot be changed without approval of a majority of the outstanding
shares of that Fund. Treasury Obligations Fund's policy of limiting its in-
vestments to U.S. Treasury Obligations and related repurchase agreements is
also fundamental. All investment objectives and policies not specifically des-
ignated as fundamental are non-fundamental and may be changed without share-
holder approval.
RESTRICTED AND OTHER ILLIQUID SECURITIES. Each Fund may purchase securities
that are not registered ("restricted securities") under the Securities Act of
1933 ("1933 Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of its net assets in illiquid investments, which include fixed
time deposits maturing in more than seven days and restricted securities.
Restricted securities (including commercial paper issued pursuant to Section
4(2) of the 1933 Act) which the Board of Trustees has determined are liquid,
based upon a continuing review of the trading markets for the specific re-
stricted security, will not be deemed to be illiquid investments for purposes
of this restriction. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring the liquidity
of restricted securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance that the market for restricted securities eligible
for resale under Rule 144A will continue to be liquid, the Adviser will care-
fully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buy-
ers become for a time uninterested in purchasing these restricted securities.
In addition, each Fund 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 Fund (taken at market
value) would be invested in such investments. 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.
20
<PAGE>
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York, a separate operating division
of Goldman Sachs, acts as investment adviser to the Funds. Goldman Sachs reg-
istered as an investment adviser in 1981. As of March , 1997, Goldman Sachs,
together with its affiliates, acted as investment adviser, administrator or
distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable Fund may enter into principal trans-
actions in certain taxable money market instruments, including repurchase
agreements, with Goldman Sachs.
Under the Management Agreements, GSAM continually manages each Fund, includ-
ing the purchase, retention and disposition of its securities and other as-
sets. In addition GSAM administers each Fund's business affairs and performs
various shareholder servicing functions to the extent not provided by other
organizations. The management of each Fund is subject to the supervision of
the Trustees and each Fund's investment policies. For these services, the
Trust, on behalf of each Fund, pays GSAM a monthly fee at an annual rate of
each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
COMBINED ADVISORY AND
ADMINISTRATIVE
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- ---------------------
<S> <C> <C>
Financial Square Prime
Obligations Fund....... .205% .17%
Financial Square Money
Market Fund............ .205% .17%
Financial Square Trea-
sury Obligations Fund.. .205% .17%
Financial Square Trea-
sury Instruments Fund.. .205% .17%
Financial Square Tax
Free Money Market Fund. .205% .17%
Financial Square Govern-
ment Fund.............. .205% N/A%
Financial Square Federal
Fund................... .205% N/A%
Financial Square Munici-
pal Money Market Fund.. .205% N/A%
Financial Square Money
Market Plus Fund....... .205% N/A%
</TABLE>
The difference, if any, between the stated advisory fee and the actual fees
paid by the Funds reflects the fact that GSAM did not charge the full amount
of advisory fees to which it would have been entitled. The combined rate paid
for the fiscal year ended December 31, 1996 includes .04% and .13% paid pursu-
ant to separate advisory and administration agreements.
GSAM has agreed not to impose all or a portion of its advisory fee and/or to
reduce or otherwise limit the total operating expenses of each Fund (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) on
an annualized basis to 0.18% of the Fund's average daily net assets. Such re-
ductions or limits are calculated monthly on a cumulative basis. GSAM has no
current intention to but may discontinue or modify any of such reductions or
limitations at its discretion.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, serves as the Dis-
tributor of shares of each Fund pursuant to a Distribution Agreement with the
Trust. The Distributor will assist in the sale of shares of each Fund upon the
terms described herein. Goldman Sachs also serves as the Transfer Agent of
each Fund.
21
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds in order to increase the assets of the Funds. In-
creasing the Fund's assets may enhance investment flexibility and diversifica-
tion. Goldman Sachs reserves the right to redeem at any time some or all of
the Fund shares acquired for its own account. Goldman Sachs will consider the
effect of redemptions on the Funds and other shareholders in deciding whether
to redeem its shares.
TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
The Treasury Instruments and Federal Funds intend to elect and each other Fund
has elected to be treated as a regulated investment company and each Fund in-
tends to continue to qualify for such treatment under Subchapter M of the In-
ternal Revenue Code of 1986 (the "Code") for each taxable year. To qualify as
such, each 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, each 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 cer-
tain timing requirements of the Code.
Dividends paid by a Fund 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 shareholders as ordinary
income, except for any "exempt-interest dividends" paid by Tax-Free Fund and
Municipal Fund, as described below. 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 gain regardless of how long the shareholders have held
their shares. These tax consequences will apply to distributions of any Fund
regardless of whether distributions are received in cash or reinvested in
shares. Certain distributions paid by the Funds in January of a given year
will be taxable to shareholders as if received on December 31 of the year in
which they are declared. Shareholders will be informed annually about the
amount and character of distributions received from the Funds for federal
income tax purposes, including any distributions that may constitute a return
of capital or any distributions of Municipal Fund that may constitute a tax
preference item under the federal alternative minimum tax.
The Tax-Exempt Funds intend to satisfy certain requirements of the Code for
the payment of "exempt-interest dividends" not included in shareholders' fed-
eral gross income. Dividends paid by these Funds from interest on tax-exempt
obligations and properly designated by the Funds as exempt-interest dividends,
including dividends attributable to exempt-interest dividends received by a
Fund from other regulated 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 social security or railroad retirement benefits are taxable.
Persons who are "substantial users" of facilities financed by certain indus-
trial development or private activity bonds should consult their own tax ad-
visers before purchasing shares of these Funds. Interest incurred to purchase
or carry shares of these Funds will not be deductible for federal income tax
purposes to the extent related to exempt-interest dividends paid by the Funds.
Individuals and certain other classes of shareholders 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 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 ordi-
nary dividends from the Funds.
22
<PAGE>
If a Fund invests in foreign securities, it may be subject to foreign with-
holding or other foreign taxes on income earned on such securities and is ex-
pected to be unable to pass such taxes through to shareholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from a Fund. A state income (and possi-
bly local income and/or intangible property) tax exemption is generally avail-
able to the extent 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 obliga-
tions issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their own tax advisers concerning these matters.
NET ASSET VALUE
The net asset value of each Fund (other than the Government and Treasury Ob-
ligations Funds) 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.
The net asset value of Government and Treasury Obligations Funds is determined
as of 5:00 p.m. New York time on each Business Day. Net asset value per share
for each class of shares of each Fund is calculated by determining the amount
of net assets attributable to each class of shares and dividing by the number
of shares for such class.
On any Business Day, as defined herein, when the Public Securities Associa-
tion ("PSA") recommends that the securities market close early, each Fund re-
serves the right to cease accepting purchase and redemption orders for same
Business Day credit at the time PSA recommends that the securities market
close. On days any Fund closes early, purchases and redemption orders received
after the PSA recommended closing time will be credited to the next Business
Day. In addition, each Fund reserves the right to advance the time by which
purchase and redemption orders must be received for same Business Day credit
as permitted by the SEC.
Each Fund seeks to maintain a net asset value of $1.00 per share. In this
connection, each Fund values its portfolio securities on the basis of amor-
tized cost. The amortized cost method values a security at its cost on the
date of purchase and thereafter assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. For a more complete description
of the amortized cost valuation method and its effect on existing and prospec-
tive shareholders, see the Statement of Additional Information. There can be
no assurance that a Fund will be able at all times to maintain a net asset
value per share of $1.00.
YIELD INFORMATION
From time to time, each Fund may advertise its yield, effective yield and
average annual total return. Average annual total return is determined by com-
puting the average annual percentage change in value of $1,000 invested at the
maximum public offering price for 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 relevant period. Each Fund may furnish total return calcula-
tions based on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules. In ad-
dition to the above, each Fund may from time to time advertise its performance
relative to certain rankings or indices. The yield of a Fund refers to the in-
come generated by an investment in that Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized;
that is, the amount of income generated by the investment during that week is
assumed to be generated each week
23
<PAGE>
over a 52-week period and is shown as a percentage of the investment. The ef-
fective yield is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed 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 Funds and the Federal and Treasury Instruments Funds may each
also quote tax-equivalent yield. Each Fund's tax-equivalent yield is calcu-
lated 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 Fund's
yield, assuming certain tax brackets for a shareholder.
Investors should note that the investment results of a Fund are based on
historical performance and will fluctuate over time. Any presentation of a
Fund's yield, effective yield or tax-equivalent yield for any prior period
should not be considered a representation of what an investment may earn or
what a Fund's yield, effective yield or tax-equivalent yield may be in any fu-
ture period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately for each class of shares in existence. Because each such class of
shares is subject to different expenses, the net yield of such classes of a
Fund for the same period may differ. See "Organization and Shares of the
Trust" below.
ORGANIZATION AND 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 se-
ries of Goldman Sachs Money Market Trust, a Massachusetts business trust and
were reorganized into the Trust as of May 1, 1997. The Trustees of the Trust
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 of
the Trust have authority 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 have authorization to classify or re-
classify any series or portfolio of shares into one or more classes. The
Trustees have authorized the issuance of four classes of shares of each of the
Funds, which are: FST Shares, FST Preferred Shares, FST Administration Shares
and FST Service Shares. (Institutions that provide services to holders of FST
Preferred Shares, FST Administration Shares or FST Service Shares are referred
to in this Prospectus as "Service Organizations").
When issued, shares are fully paid and nonassessable. In the event of liqui-
dation, shareholders are entitled to share pro rata in the net assets of the
applicable Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share (but may, at the discretion of the
Trustees, be voted on a net asset value basis), have noncumulative voting
rights, are freely transferable and have no preemptive, subscription or con-
version rights.
Shares of a Fund will be voted separately by Fund with respect to matters
pertaining to that Fund except for the election of Trustees and ratification
of independent accountants. For example, shareholders of each Fund are re-
quired to approve the adoption of any investment advisory agreement relating
to that Fund and any changes in fundamental investment restrictions or poli-
cies of such Fund. Approval by the shareholders of one Fund is effective only
as to that Fund.
24
<PAGE>
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, com-
municate with other shareholders in connection with requiring a special meet-
ing of shareholders. The Trustees, however, 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.
25
<PAGE>
PURCHASE OF SHARES
FST Shares of a Fund may be purchased on any Business Day at the net asset
value next determined after receipt of a purchase order in the manner set
forth below, and provided that The Northern Trust Company ("Northern"), Chica-
go, Illinois, the sub-custodian for State Street Bank and Trust Company
("State Street"), receives the purchase price in Federal Funds on the same
Business Day. Purchase orders may be made by telephoning Goldman Sachs at 800-
621-2550 or by a written request addressed to Goldman Sachs, Attention: Share-
holder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606. It is strongly recommended that payment be effected by wiring Federal
Funds to Northern.
Purchases of FST Shares may also be made by delivering a Federal Reserve
draft or check (except that a third party check will not be accepted) payable
only to the appropriate Fund and drawn on a U.S. bank to Goldman Sachs, Atten-
tion: Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago,
Illinois 60606. It is expected that Federal Reserve drafts will ordinarily be
converted to Federal Funds on the day of receipt and that checks will be con-
verted to Federal Funds within two Business Days after receipt. FST Shares
purchased by check may not be redeemed until the check has cleared, as de-
scribed under "Redemption of Shares."
Purchases of shares of any Fund may also be made through an Automated Clear-
ing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
FST Shares of each Fund are deemed to have been purchased when an order be-
comes effective and are entitled to dividends on FST Shares purchased as fol-
lows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED BY GOLDMAN SACHS DIVIDENDS BEGIN
------------------------------------- ---------------
(1) In the case of Taxable Funds (except for Government
and Treasury Obligations Funds)
<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>
<TABLE>
(2) In the case of the Government and
Treasury Obligations Funds
<S> <C>
By:5:00 p.m.--N.Y. time Same Business Day
- ----------------------------------------------------
After:5:00 p.m.--N.Y. time Next Business Day
- ----------------------------------------------------
</TABLE>
<TABLE>
(3) In the case of Municipal Fund
<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>
25
<PAGE>
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED BY GOLDMAN SACHS DIVIDENDS BEGIN
------------------------------------- ---------------
<S> <C>
(4) In the case of Tax-Free Fund
By:2:00 p.m.- N.Y. time Same Business Day
- ---------------------------------------------------------------
After:2:00 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.
FST Shares of the Funds are purchased at the net asset value per share with-
out the imposition of a sales charge. However, banks, trust companies or other
institutions through which investors acquire FST Shares may impose charges in
connection with transactions in such Shares.
Goldman Sachs, as each Fund's transfer agent, will maintain a complete rec-
ord of transactions and FST Shares held in each shareholder's account. The
Trust and Goldman Sachs each reserves the right to reject any purchase order
for any reason.
INITIAL PURCHASES
The minimum requirement for investing in a Fund is $50 million ($10 million
if an investor satisfies the minimum initial investment in any other Fund).
The Trust and Goldman Sachs each reserves the right to waive the minimum in-
vestment requirement. Before or immediately after placing an initial purchase
order, investors should complete and send to Goldman Sachs the Account Infor-
mation Form included at the end of this Prospectus.
SUBSEQUENT INVESTMENTS
There is no minimum amount required for subsequent investments. Orders for
the purchase of additional FST Shares should be accompanied by information
identifying the account and the Fund in which FST Shares are to be purchased.
REPORTS TO SHAREHOLDERS
FST Shareholders of each Fund will receive an annual report containing au-
dited financial statements and a semiannual report. Each FST Shareholder will
also be furnished with an individual monthly statement. Upon request, a
printed confirmation for each transaction will be provided by Goldman Sachs.
Any dividends and distributions paid by a Fund are also reflected in regular
statements issued by Goldman Sachs. A year-to-date statement for any account
will be provided upon request made to Goldman Sachs. FST Shareholders with in-
quiries regarding a Fund may call Goldman Sachs at 800-621-2550 (8:00 a.m. to
6:30 p.m. New York time) or write Goldman Sachs at the address shown under
"The Distributor and Transfer Agent."
SUB-ACCOUNTING SERVICES
The Trust has designed special procedures to assist banks and other institu-
tional investors 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 un-
less 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 monthly income together with the
total share balance and monthly income for the master account.
26
<PAGE>
To assist banks and other institutional investors performing their own sub-
accounting, each Fund's daily income per share, calculated to nine decimal
places, and its annualized yield are normally available by 4:00 p.m. New York
time for each Fund other than Government Fund and Treasury Obligations Fund
and as of 5:00 p.m. New York time for Government Fund and Treasury Obligations
Fund each day.
DISTRIBUTIONS
All or substantially all of each Fund's net investment income will be de-
clared daily (as of 4:00 p.m. New York time for each Fund other than Govern-
ment Fund and Treasury Obligations Fund and as of 5:00 p.m. New York time for
Government Fund and Treasury Obligations Fund) as a dividend and distributed
to FST Shareholders monthly. Distributions will be made in additional FST
Shares of the same Fund or, at the election of FST Shareholders, in cash. The
election to reinvest dividends and distributions or receive them in cash may
be changed at any time upon written notice to Goldman Sachs. If no election is
made, all dividends and capital gain distributions will be reinvested. Divi-
dends will be reinvested as of the last calendar day of each month. Cash dis-
tributions will be paid on or about the first business day of each month. Net
short-term capital gains, if any, will be distributed in accordance with the
requirements of the Code and may be reflected in the Fund's daily distribu-
tions. Each Fund may distribute at least annually its long-term capital gains,
if any, after reduction by available capital losses. In order to avoid exces-
sive fluctuations in the amount of monthly capital gains distributions, a por-
tion of any net capital gains realized on the disposition of securities during
the months of November and December may be distributed during the subsequent
calendar year. Although realized gains and losses on the assets of a Fund are
reflected in the net asset value of the Fund, they are not expected to be of
an amount which would affect the Fund's net asset value of $1.00 per share.
The income declared as a dividend for the Treasury Obligations Fund is based
on estimates of net investment income for the Fund. Actual income may differ
from estimates, and differences, if any, will be included in the calculation
of subsequent dividends.
A Fund'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 Fund
from sources other than capital gains over (iii) the amortization of market
premium on all portfolio securities and (iv) the estimated expenses of the
Fund, including a proportionate share of the general expenses of the Trust.
EXCHANGES
FST Shares of each Fund may be exchanged for shares of the corresponding
class of any Fund or Portfolio of Goldman Sachs Trust at the net asset value
next determined either by writing to Goldman Sachs, Attention: Shareholder
Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606 or by
calling Goldman Sachs at 800-621-2550. All telephone exchanges must be
registered in the same name(s) and with the same address as are registered in
the Fund from which the exchange is being made. 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 Shares" to confirm that such instructions are
genuine. Exchanges are available only in states where the exchange may legally
be made. The exchange privilege may be modified or withdrawn at any time on 60
days' written notice.
REDEMPTION OF SHARES
HOW TO REDEEM
FST Shareholders may redeem FST Shares of a Fund without charge upon request
on any Business Day at the net asset value next determined after receipt of
the redemption request. Redemption requests may be made by
27
<PAGE>
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. The letter of instruction must specify
the number of FST Shares of the particular Fund to be redeemed, the account
number, payment instructions and the exact registration on the account. Signa-
tures must be guaranteed in accordance with the procedures set forth below, if
the proceeds are to be paid to other than pre-established instructions on file
with the Fund. 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 requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If reasonable procedures are not implement-
ed, the Trust may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, neither the Trust nor Goldman Sachs will be
responsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Funds by means of
the check redemption privilege described in the Statement of Additional Infor-
mation. Goldman Sachs reserves the right to redeem accounts with balances be-
low $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs. The payment of
redemption proceeds for FST Shares recently purchased by check will be delayed
for up to 15 days until the check has cleared.
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
bank account designated on the FST Shareholder's Account Information Form.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED REDEMPTION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
- --------------------------- ------------------- ---------
<S> <C> <C>
(1) In the case of Taxable Funds (except for Government and Treasury Obligations Funds)
By:3:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day request is
received
- ---------------------------------------------------------------------------------------
After:3:00 p.m.--N.Y.
time Wired Next Business Day Earned on Day request is
received
- ---------------------------------------------------------------------------------------
(2) In the case of the Government and Treasury Obligations Funds
By:5:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day request is
received
- ---------------------------------------------------------------------------------------
After:5:00 p.m.--N.Y.
time Wired Next Business Day Earned on Day request is
received
- ---------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED REDEMPTION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
- --------------------------- ------------------- ---------
<S> <C> <C>
(3) In the case of Tax-Free Fund
By:1:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day request is
received
- ---------------------------------------------------------------------------------------
After:1:00 p.m.--N.Y.
time Wired Next Business Day Earned on Day request is
received
- ---------------------------------------------------------------------------------------
(4) In the case of the Municipal Fund
By:12:00 noon--N.Y. time Wired Same Business Day Not earned on Day request is
received
- ---------------------------------------------------------------------------------------
After:12:00 noon--N.Y.
time Wired Next Business Day Earned on Day request is
received
- ---------------------------------------------------------------------------------------
</TABLE>
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 Account In-
formation Form. Redemption proceeds will normally be wired as set forth above,
but may be paid up to three Business Days after receipt of a properly executed
redemption request. For example, payment may be delayed if the Federal 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 intermediaries
or the FST Shareholder's bank in the transfer process. If a problem with such
performance arises, the FST Shareholder should deal directly with such inter-
mediaries or bank.
An FST Shareholder may change the bank designated to receive redemption pro-
ceeds by providing a written notice to Goldman Sachs which has been signed by
the FST Shareholder or its authorized representative. This signature must be
guaranteed by a bank, a securities broker or dealer, a credit union having au-
thority 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 associa-
tion or a clearing agency, provided that such institution satisfies the stan-
dards established by Goldman Sachs. Goldman Sachs may also require additional
documentation in connection with a request to change the designated bank.
OTHER REDEMPTION INFORMATION
A minimum account balance of $50 million in a Fund ($10 million if an in-
vestor satisfies the minimum initial investment in any other Fund) is required
to remain a FST Shareholder. A Fund may redeem all of the FST Shares of any
FST Shareholder whose account in that Fund has a net asset value which is less
than the minimum described above. The Trust will give sixty (60) days' prior
written notice to such shareholders whose FST Shares are being redeemed to al-
low them to purchase sufficient additional FST Shares of the Fund to avoid
such redemption.
----------------
29
<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 Social Secu-
rity or other 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, ex-
changes 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 Reve-
nue Service (IRS). Backup withholding could 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 estab-
lished 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 with-
holding 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 with-
holding 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 securi-
ties and commodities dealers and others.
If you are a nonresident alien or foreign entity, you must provide a com-
pleted 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 withhold-
ing 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 FUNDS--ACCOUNT INFORMATION FORM
This Account Information Form Should be Forwarded Promptly to Goldman, Sachs &
Co.
No Redemption Can be Made Prior to Its Receipt
Master No. _________________
Send to: Goldman Sachs Funds
4900 Sears Tower Fund Use Only
Chicago, IL 60606
1-800-621-2550 Date: ______________________
FINANCIAL SQUARE FUNDS
[_]Financial Square Prime Obligations [_]Goldman Sachs - Adjustable Rate
Fund Government Fund
[_]Financial Square Money Market Fund
[_]Goldman Sachs - Short Duration
Government Fund
[_]Financial Square Money Market Plus
Fund [_]Goldman Sachs - Short Duration Tax-Free
Fund
[_]Financial Square Treasury
Obligations Fund [_]Goldman Sachs - Core Fixed Income Fund
[_]Goldman Sachs Global Income Fund
[_]Financial Square Treasury
Instruments Fund [_]Other Goldman Sachs Funds
[_]Financial Square Government Fund
Fill in Fund(s): __________________
[_]Financial Square Federal Fund
[_]Financial Square Tax-Free Money
Market Fund
[_]Financial Square Municipal Money
Market Fund
[_]Other
Fill in Fund(s): __________________
A. ACCOUNT RECORD
- -------------------------------------------------------------------------------
---------------------------------------
Telephone Number
- ---------------------------------------
Name of Account U.S. Citizen or
Resident? Yes [_]No [_]
- ---------------------------------------
Street or P.O. Box If no is checked, fill in country of
tax residence:
- ---------------------------------------
City State Zip ---------------------------------------
- ---------------------------------------
Attention
B. DIVIDENDS AND DISTRIBUTIONS--Check appropriate box (see "Dividends" in Pro-
spectus)
- -------------------------------------------------------------------------------
Dividends (including net short-term [_] Cash [_] Shares
capital gains)
Net Long-Term Capital Gains Distributions [_] Cash [_] Shares
Dividends and capital gains
reinvested in another fund in the
Goldman Sachs Funds (see
Prospectus for more information) [_] Shares
Fill in Fund: __________________________
(If no box is checked, dividends and capital gains distributions will be rein-
vested in the account.)
C. SOCIAL SECURITY NUMBER OR OTHER TAXPAYER IDENTIFICATION NUMBER CERTIFICA-
TION
- -------------------------------------------------------------------------------
Taxpayer Identification Number: __________________
Under penalties of perjury, I certify that (1) The number shown on this form
is my correct Taxpayer Identification Number (or I am waiting for a number to
be issued to me), and (2) I am not subject to backup withholding because I am
exempt from backup withholding or I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or the IRS has notified me that I
am no longer subject to backup withholding. See the "Guidelines for Certifica-
tion of Taxpayer Identification Number on Account Information Form," contained
in the Appendix to the accompanying Prospectus.
------------------------------- ---------------------------------------
SIGN HERE
Signature Name (print) and Title (if any)
------------------------------- ---------------------------------------
Date
D. OPTIONAL TELEPHONE EXCHANGE (see "Exchange Privilege" in Prospectus)
- -------------------------------------------------------------------------------
[_]Goldman, Sachs & Co. is hereby authorized to accept and act upon telephone
instructions from the undersigned or any other person for the exchange of
shares of the Fund into any fund described in the accompanying Prospectus.
The undersigned understands and agrees that neither the applicable Fund nor
Goldman, Sachs & Co. will be liable for any loss, expense, or cost arising
out of any telephone request.
E. REDEMPTION PLANS--Check one box only (see "Redemption of Shares" in Pro-
spectus)
- -------------------------------------------------------------------------------
[_]I authorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic, or other
instructions WITHOUT SIGNATURE GUARANTEE, from any person for the redemption
of shares for the above account provided that the proceeds are transmitted
to the following bank account(s) only. I understand any changes to the fol-
lowing information must be made in writing to GOLDMAN, SACHS & CO., must
contain the appropriate number of signatures listed below and all signatures
MUST BE SIGNATURE GUARANTEED. Absent its own gross negligence, neither the
applicable Fund nor GOLDMAN, SACHS & CO. shall be liable for such redemp-
tions or for payments made to any unauthorized account.
Continued on next page
<PAGE>
[_]I have furnished GOLDMAN, SACHS & CO., WITH A SIGNATURE GUARANTEE (See sec-
tion F). I authorize GOLDMAN, SACHS & CO. to honor telephone, telegraphic, or
other instructions from any person for the redemption of shares for the above
account provided that the proceeds are transmitted to the following bank ac-
count(s) only. Any changes to the following information must be made in writ-
ing to GOLDMAN, SACHS & CO., (but without signature guarantee) and contain
the appropriate number of signatures listed below. Absent its own gross neg-
ligence, neither the applicable Fund nor GOLDMAN, SACHS & CO. shall be liable
for such redemptions or fee payments made to any unauthorized account.
Additional documentation may be required for certain accounts
Please complete the following bank account information and place a line through
the unused portion.
Additional instructions may be added on separate pages, if necessary.
Number of Bank Account Destinations completed in Section E of this form: [_]
1) ___________________________________ 3) _____________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ----------------------------------------
Street Address Street Address
------------------------------------ ----------------------------------------
City State Zip City State Zip
------------------------------------ ----------------------------------------
Account Name Account No. Account Name Account No.
2) ___________________________________ 4) _____________________________________
Bank Name Bank Routing No. Bank Name Bank Routing No.
------------------------------------ ----------------------------------------
Street Address Street Address
------------------------------------ ----------------------------------------
City State Zip City State Zip
------------------------------------ ----------------------------------------
Account Name Account No. Account Name Account No.
[_] Special Draft (Transfer Agent to Supply)[_] By Mail
F. SIGNATURE AUTHORIZATION
- --------------------------------------------------------------------------------
By the execution of this Account Information Form, the undersigned represents
and warrants that it has full right power and authority to make the investment
applied for pursuant to this application and is acting for itself or in some
fiduciary capacity in making such investment.THE UNDERSIGNED UNDERSTANDS THAT
NON-MONEY MARKET FUNDS DO NOT MAINTAIN A CONSTANT NET ASSET VALUE AND FURTHER
THAT A CONSTANT NET ASSET VALUE IN MONEY MARKET FUNDS IS NOT GUARANTEED. AS A
RESULT THE UNDERSIGNED MAY EXPERIENCE A LOSS OF PRINCIPAL ON ITS INVESTMENT.
The undersigned affirms that it has received a current prospectus for the Funds
and has reviewed the same.
Number of Signatures required to make changes to this form. [_]
------------------------- ------------------------------------
SIGN HERE Signature Name (print) and Title (if any)
------------------------- ------------------------------------
Date
------------------------- ------------------------------------
Signature Name (print) and Title (if any)
------------------------- ------------------------------------
Date
-------------------------- ------------------------------------
Signature Name (print) and Title (if any)
-------------------------- ------------------------------------
Date
G. SIGNATURE GUARANTEE
- --------------------------------------------------------------------------------
- ---------------------------------- Affix Guarantee Stamp Here
Signature Guaranteed By
- ----------------------------------
Authorized Signature
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FST SHARES
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder and Fund Expenses..............................................
Financial Highlights.......................................................
An Introduction to the Funds...............................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Shares of the Trust.......................................
Purchase of Shares.........................................................
Reports to Shareholders....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Shares.......................................................
Appendix................................................................... A-1
Account Information Form
</TABLE>
FST-IFS-MMT15K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST SHARES
-----------
PROSPECTUS
-----------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST ADMINISTRATION SHARES
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management invest-
ment company (a "mutual fund") which includes the Financial Square Funds (the
"Funds"). This Prospectus relates only to the offering of FST Administration
shares of beneficial interest ("FST Administration Shares") of the Funds.
Goldman Sachs Asset Management, a separate operating division of Goldman,
Sachs & Co., serves as each Fund's investment adviser. Goldman, Sachs & Co.
serves as each Fund's distributor and transfer agent.
The following Funds seek 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 Funds may invest in
diversified portfolios of the following types of instruments:
Financial Square Prime Obligations Fund. 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.
Financial Square Money Market Fund. Securities of the U.S. Government, its
agencies, authorities and instrumentalities, U.S. dollar denominated obliga-
tions of U.S. and foreign banks, U.S. dollar denominated commercial paper and
other short-term obligations of U.S. and foreign companies, foreign govern-
ments, states, municipalities and other entities, and repurchase agreements.
Financial Square Money Market Plus Fund. Securities of the U.S. Government,
its agencies, authorities and instrumentalities, U.S. dollar denominated obli-
gations of U.S. and foreign banks, U.S. dollar denominated commercial paper
and other short-term obligations of U.S. and foreign companies, foreign gov-
ernments, states, municipalities and other entities, and repurchase agree-
ments. In order to obtain a rating from a rating organization, the Fund will
observe special investment restrictions.
Financial Square Treasury Obligations Fund. Securities issued or guaranteed
by the U.S. Treasury and repurchase agreements relating to such securities.
Financial Square Treasury Instruments Fund. Securities issued or guaranteed
by the U.S. Treasury.
Financial Square Government Fund. Securities of the U.S. Government, its
agencies, authorities, and instrumentalities, and repurchase agreements relat-
ing to such securities.
Financial Square Federal Fund. Securities of the U.S. Government and certain
of its agencies, authorities and instrumentalities, the interest income from
which is generally exempt from state income taxation.
Financial Square Tax-Free Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes and
not an item of tax preference under the federal alternative minimum tax.
Financial Square Municipal Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes (but
not necessarily exempt from federal alternative minimum tax or state and local
taxes).
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT AND THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION.................
Goldman Sachs Mutual Funds-Toll Free: 800-621-2550
This Prospectus provides you with information about the Funds that you should
know before investing in FST Administration Shares. It should be read and re-
tained for future reference. If you would like more detailed information, the
Statement of Additional Information dated May 1, 1997, as amended or supple-
mented from time to time, is available upon request without charge from Serv-
ice Organizations, as defined herein, or by calling the telephone number
listed above or by writing Goldman, Sachs & Co., 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 Ex-
change Commission. Not all Funds are available in certain states. Please call
the phone number listed above to determine availability in your state.
- -------------------------------------------------------------------------------
FST ADMINISTRATION 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
SHAREHOLDER AND FUND EXPENSES (NOTE 1)
FST ADMINISTRATION SHARES (NOTE 2)
<TABLE>
<CAPTION>
FINANCIAL FINANCIAL FINANCIAL
FINANCIAL FINANCIAL SQUARE FINANCIAL FINANCIAL SQUARE SQUARE
SQUARE SQUARE MONEY SQUARE SQUARE FINANCIAL FINANCIAL TAX-FREE MUNICIPAL
PRIME MONEY MARKET TREASURY TREASURY SQUARE SQUARE MONEY MONEY
OBLIGATIONS MARKET PLUS OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND FUND FUND
----------- --------- --------- ----------- ----------- ---------- --------- --------- ---------
<S> <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
Sales Charge Imposed
on Reinvested
Distributions...... None None None None None None None None None
Deferred Sales Load
Imposed on
Redemptions........ None None None None None None None None None
Exchange Fee........ None None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage of
average daily
net assets)
Management Fees
(Note 3) (after
adjustments) ...... 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17%
Other Expenses
Administration
Fees (Note 4).... 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses
(after expense
limitations)
(Note 3)......... 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES
(Note 3)............. 0.43% 0.43% 0.43% 0.43% 0.43% 0.43% 0.43% 0.43% 0.43%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Financial Square Prime Obligations Fund... $ $ $ $
Financial Square Money Market Fund........ $ $ $ $
Financial Square Money Market Plus Fund... $ $ N/A N/A
Financial Square Treasury Obligations
Fund..................................... $ $ $ $
Financial Square Treasury Instruments
Fund..................................... $ $ N/A N/A
Financial Square Government Fund.......... $ $ $ $
Financial Square Federal Fund............. $ $ N/A N/A
Financial Square Tax-Free Money Market
Fund..................................... $ $ $ $
Financial Square Municipal Money Market
Fund..................................... $ $ N/A N/A
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the var-
ious costs and expenses that an investment in the Funds will bear directly
or indirectly. Operating expenses for Financial Square Money Market Plus
Fund, Financial Square Municipal Money Market Fund, Financial Square Fed-
eral Fund and Financial Square Treasury Instruments Fund are based on es-
timates of expenses expected to be incurred during the fiscal year ending
December 31, 1997. Operating expenses for the other Funds are based on ac-
tual amounts incurred during the fiscal year ended December 31, 1996.
These expenses are expected to be incurred on an ongoing basis. The table
and hypothetical example should not be considered a representation of past
or future expenses; actual expenses may vary depending upon a variety of
factors including the actual performance of each Fund, which may be
greater or less than 5%. See "Management."
(2) The information set forth in the foregoing table and example relates only
to FST Administration Shares of the Funds. The Funds also offer FST
Shares, FST Preferred Shares and FST Service 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 any other class of the Funds may be obtained from
your sales representative or from Goldman Sachs by calling the number on
the front cover of this Prospectus. See "Organization and Shares of the
Trust."
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed that a
portion of its fee will not be imposed. In addition, the Adviser has
agreed to reduce or otherwise limit certain expenses of each Fund (exclud-
ing fees payable to Service Organizations, as defined herein, taxes, in-
terest and brokerage and litigation, indemnification and other extraordi-
nary expenses), on an annualized basis, to .18% of such Fund's average
daily net assets. The following table sets forth the expenses payable by
each Fund not reflecting the reduction of fees otherwise payable and any
expense limitations:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT ADMINISTRATIVE OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- -------------- -------- ---------
<S> <C> <C> <C> <C>
Financial Square Prime Obli-
gations Fund................ 0.205% 0.25% % %
Financial Square Money Market
Fund........................ 0.205% 0.25% % %
Financial Square Money Market
Plus Fund................... 0.205% 0.25% % %
Financial Square Treasury Ob-
ligations Fund.............. 0.205% 0.25% % %
Financial Square Treasury In-
struments Fund.............. 0.205% 0.25% % %
Financial Square Government
Fund........................ 0.205% 0.25% % %
Financial Square Federal
Fund........................ 0.205% 0.25% % %
Financial Square Tax-Free
Money Market Fund........... 0.205% 0.25% % %
Financial Square Municipal
Money Market Fund........... 0.205% 0.25% % %
</TABLE>
(4) Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of FST Administration Shares
in connection with their customers' accounts. See "Administration." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a share (of the class specified) of the
Financial Square Prime Obligations, Financial Square Money Market, Financial
Square Treasury Obligations, Financial Square Government and Financial Square
Tax-Free Money Market Funds outstanding during the periods indicated have been
audited by independent auditors, as indicated in their report incorpo-
rated by reference and attached to the Statement of Additional Information
from the annual report to shareholders for the fiscal year ended December 31,
1996 (the "Annual Report"), and should be read in conjunction with the finan-
cial statements and related notes incorporated by reference and attached to
the Statement of Additional Information.
Financial Square Municipal Money Market, Financial Square Money Market Plus,
Financial Square Federal and Financial Square Treasury Instruments Funds had
no operations during the fiscal year ended December 31, 1996. Accordingly,
there are no selected per share data and ratios presented for these Funds.
4
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- -------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- -------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- -------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- -------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
9
<PAGE>
AN INTRODUCTION TO THE FUNDS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment Company Act"). Each Fund 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 Funds' investment ad-
viser (the "Adviser" or "GSAM").
THE DISTRIBUTOR: Goldman Sachs, which serves as the Funds' distributor and
transfer agent, is one of the largest international investment banking and
brokerage firms in the United States.
THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value and convenient liquidation priv-
ileges. The Funds are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers. Shares of the Government Fund
are intended to qualify as eligible investments for Federally chartered credit
unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit
Union Act, Part 703 of the National Credit Union Administration ("NCUA") Rules
and Regulations and NCUA Letter Number 155. The Fund intends to review changes
in the applicable laws, rules and regulations governing eligible investments
for federally chartered credit unions, and to take such action as may be nec-
essary so that the investments of the Fund qualify as eligible investments un-
der the Federal Credit Union Act and the regulations thereunder. Shares of the
Government Fund, however, may or may not qualify as eligible investments for
particular state chartered credit unions. State chartered credit unions should
consult qualified legal counsel to determine whether the Government Fund is a
permissible investment under the law applicable to it.
THE FUNDS: Each Fund'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 Fund may invest only in securities that are de-
termined to present minimal credit risk and meet certain other criteria.
TAXABLE FUNDS: Prime Obligations, Money Market, Money Market Plus, Trea-
sury Obligations, Government, Treasury Instruments and Federal Funds.
TAX-EXEMPT FUNDS: Tax-Free Money Market and Municipal Money Market Funds.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE FUNDS AND TAX-EXEMPT
FUNDS: To maximize current income to the extent consistent with the preser-
vation of capital and the maintenance of liquidity by investing exclusively
in high quality money market instruments. In order to obtain a rating from
a rating organization, the Money Market Plus Fund will observe special in-
vestment restrictions. The Treasury Instruments and Federal Funds pursue
their objectives by limiting their investments to certain U.S. Treasury Ob-
ligations and U.S. Government Securities (each as defined herein), respec-
tively, the interest from which is generally exempt from state income taxa-
tion. Each investor should consult his or her tax adviser to determine
whether distributions from the Treasury Instruments and Federal Funds (and
any other Fund that may hold such obligations) derived from interest on
such obligations are exempt from state income taxation in the investor's
own state.
NET ASSET VALUE: Each Fund seeks to maintain a stable net asset value of
$1.00 per share.
MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: Thirteen months at the
time of purchase.
10
<PAGE>
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY: Not more than ninety days.
FIRST TIER SECURITIES: Each Fund 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, comparable 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 defined herein
are considered First Tier Securities.
SECOND TIER SECURITIES: The Tax-Exempt Funds 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 Taxable Funds 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 Fund may purchase Second Tier Securities,
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.
11
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED & FOREIGN
US US OBLIGATIONS CORPORATIONS RECEIVABLES- GOVERNMENT
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED OBLIGATIONS
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES (US$)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Obligations US Banks US Rated
Fund Only Entities Only
Only
- -----------------------------------------------------------------------------------------------------------------------------
Money Market [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Fund Over 25% of US and US and Rated
total assets Foreign Foreign Only
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Money Market
Plus Fund [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Over 25% of US and US and
total assets Foreign Foreign
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [ ] [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Government Fund [ ] [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Municipal Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Federal Fund [ ] [ ] [ ]
(Does
not
intend
to
invest)
</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.
12
<PAGE>
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED SUMMARY OF
MUNICIPALS MUNICIPAL QUALITY**** COMPANIES SECURITIES TAXATION* MISCELLANEOUS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] First [ ] [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May (but does
At least 80% of Second Up to 10% of Federal and not currently
net assets in Tier total assets Taxable intend to)
Municipal in other State*** invest up to 20%
Instruments investment in AMT
(except in companies securities and
extraordinary may temporarily
circumstances) invest in the
taxable money
market
instruments
described herein
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May invest up to
At least 80% of Second Up to 10% of Federal and 100% in AMT
net assets in Tier total assets Taxable securities and
Municipal in other State*** may temporarily
Instruments investment invest in the
(except in companies taxable money
extraordinary market
circumstances) instruments
described herein
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable Under
Tier Up to 10% of Federal and extraordinary
total assets generally circumstances,
in other exempt from may hold cash,
investment state taxation U.S. Government
companies Securities
subject to state
taxation or cash
equivalents
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets generally
in other exempt from
investment state taxation
companies
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Securities interest in many states.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
**** A Fund holding a security fully supported by a guarantee may substitute
the credit quality of the guarantee in determining the credit quality of
the security.
13
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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 Fund may also invest in separately traded principal and interest compo-
nents of securities guaranteed or issued by the U.S. Treasury if such compo-
nents are traded independently under the Separate Trading of Registered Inter-
est and Principal of Securities program ("STRIPS").
The Treasury Instruments and Federal Funds invest in U.S. Treasury Obliga-
tions and certain U.S. Government Securities (including U.S. Treasury Obliga-
tions), respectively, the interest from which is generally exempt from state
income taxation. Securities generally eligible for this exemption include
those issued by the U.S. Treasury and those issued by certain agencies, au-
thorities or instrumentalities of the U.S. Government, including the Federal
Home Loan Banks, Federal Farm Credit Banks, Tennessee Valley Authority and the
Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may also acquire securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities 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. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "U.S. Bank Obligations" limited to securities issued or guaranteed by U.S.
banks (including certificates of deposit, commercial
14
<PAGE>
paper, unsecured bank promissory notes and bankers' acceptances) which have
more than $1 billion in total assets at the time of purchase. Such obligations
may also include debt obligations issued by U.S. subsidiaries of such banks.
The Money Market and Money Market Plus Funds may also invest in "Foreign
Bank Obligations" limited to U.S. dollar denominated obligations issued or
guaranteed (including fixed time deposits) by foreign banks which have more
than $1 billion in total assets at the time of purchase, U.S. branches of such
foreign banks (Yankee obligations), foreign branches of such foreign banks and
foreign branches of U.S. banks having more than $1 billion in total assets at
the time of purchase. Such bank obligations may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the spe-
cific obligations or by government regulation.
The Money Market and Money Market Plus Funds will invest more than 25% of
their total assets in bank obligations (whether foreign or domestic). However,
if adverse economic conditions prevail in the banking industry (such as sub-
stantial losses on loans, increases in non-performing assets and charge-offs
and declines in total deposits) the Funds may, for defensive purposes, tempo-
rarily invest less than 25% of their total assets in bank obligations. As a
result, the Funds may be especially affected by favorable and adverse develop-
ments in or related to the banking industry. The activities of U.S. banks and
most foreign banks are subject to comprehensive regulations which, in the case
of U.S. regulations, have undergone substantial changes in the past decade.
The enactment of new legislation or regulations, as well as changes in inter-
pretation and enforcement of current laws, may affect the manner of operations
and profitability of domestic and foreign banks. Significant developments in
the U.S. banking industry have included deregulation of interest rates, in-
creased competition from other types of financial institutions, increased ac-
quisition activity, geographic expansion and, during the late 1980's, an in-
creased number of bank failures. Banks may be particularly susceptible to cer-
tain economic factors, such as interest rate changes and adverse developments
in the market for real estate. Fiscal and monetary policy and general economic
cycles can affect the availability and cost of funds, loan demand and asset
quality and thereby impact the earnings and financial conditions of banks. See
"Foreign Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Commercial Paper" (including variable amount master demand notes and as-
set-backed commercial paper) which is payable in U.S. dollars and is issued or
guaranteed by U.S. corporations, U.S. commercial banks, foreign corporations
(Money Market and Money Market Plus Funds only), foreign commercial banks
(Money Market and Money Market Plus Funds only) or other entities. In addi-
tion, the Funds 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, foreign corporations (Money Market and Money Market Plus
Funds only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Asset-Backed and Receivables-Backed Securities" which represent participa-
tions in, or are secured by and payable from, pools of assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of var-
ious types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. Such asset pools are
securitized through the use of privately-formed trusts or special purpose cor-
porations. Payments or distributions of principal
15
<PAGE>
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. To the extent con-
sistent with its investment objectives and policies, each of the Prime Obliga-
tions, Money Market and Money Market Plus Funds may invest in new types of
mortgage-related securities and in other asset-backed securities that may be
developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market and Money Market Plus Funds may invest in U.S. dollar de-
nominated obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government or any entity located or organized coun-
tries that maintain a short-term foreign currency rating in the highest short-
term rating categories by at least 2 NRSROs, or if unrated, deemed to be
equivalent by the Trustees. The Money Market and Money Market Plus Funds may
not invest more than 25% of their total assets in the securities of any one
foreign government.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
TYPES OF MUNICIPAL INSTRUMENTS:
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET AND
MUNICIPAL MONEY MARKET FUNDS
-------------------------------------------------------------------------
<S> <C>
FIXED RATE NOTES AND SIMILAR In highest short-term or one of the
DEBT INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
VARIABLE AND FLOATING RATE In highest short-term or one of the
DEMAND INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER In highest rating category
-------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two highest rating
categories
-------------------------------------------------------------------------
UNRATED NOTES, PAPER, BONDS AND Determined to be of comparable quality
OTHER INSTRUMENTS by Adviser pursuant to criteria
approved by the Trustees
</TABLE>
16
<PAGE>
As a matter of fundamental policy, at least 80% of each of the Tax-Free
Money Market and Municipal Money Market Fund's net assets will ordinarily be
invested in Municipal Instruments. Each Tax-Exempt Fund 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 each
Tax-Exempt Fund. The Prime Obligations, Money Market and Money Market Plus
Funds may invest in short-term obligations issued or guaranteed by state and
municipal governments when yields on such securities are attractive compared
to other taxable investments.
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 Fund's average portfolio maturity. There is a risk
that a Fund will not be considered the owner of a tender option bond for fed-
eral 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 Funds to sell them at
par value plus accrued interest
17
<PAGE>
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 consider-
ing whether an obligation meets a Fund's quality standards, the Fund will look
to the creditworthiness of the party providing unconditional demand features
or other unconditional obligations to support the credit of the issuer of the
security. A Fund may consider the maturity of a variable or floating rate Mu-
nicipal Instrument to be shorter than its ultimate stated maturity if the Fund
has the right to demand prepayment of its principal at specified intervals
prior to the security's ultimate stated maturity, subject to the conditions
for using amortized cost valuation under the Investment Company Act. A Fund
may purchase such variable or floating rate obligations 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 Funds (other than the Treasury Obliga-
tions, Treasury Instruments, Government and Federal Funds) may invest in in-
dustrial development bonds (generally referred to under current tax law as
"private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to shareholders un-
der the federal alternative minimum tax. See "Taxes" and "Distributions." Mu-
nicipal Fund may invest up to 100% of its assets in private activity bonds.
Tax-Free Fund does not currently intend to invest in such bonds. If Tax-Free
Fund's policy not to invest in private activity bonds should change in the fu-
ture, shareholders would be notified and such investments would not exceed 20%
of Tax-Free Fund's net assets.
OTHER POLICIES. Ordinarily the Tax-Exempt Funds expect that 100% of their
portfolio securities will be Municipal Instruments. However, the Funds may
hold cash or invest in short-term taxable securities as set forth above. Such
Funds may invest 25% or more of the value of their respective total assets in
Municipal Instruments which are related in such a way that an economic, busi-
ness or political development or change affecting one Municipal Instrument
would also affect the other Municipal Instruments. For example, the Tax Exempt
Funds may invest all of their respective assets in (a) Municipal Instruments
the interest on which is paid solely from revenues from similar projects such
as hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies or life care facili-
ties, (b) Municipal Instruments whose issuers are in the same state or (c) in-
dustrial development obligations. Concentration of a Fund's investments in
these Municipal Instruments will subject the Fund, 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 Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may purchase Municipal Instruments which are backed
by letters of credit, which will ordinarily be irrevocable, issued by domestic
banks or foreign banks (excluding Prime Obligations Fund) which have a branch,
agency or subsidiary in the United States. In addition, these Funds may ac-
quire securities in the form of custodial receipts which evidence ownership 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 Fund (other than the Treasury Obligations, Treasury Instru-
ments, Government and Federal Funds) may acquire the right to sell the secu-
rity to another party at a guaranteed price and date.
18
<PAGE>
REPURCHASE AGREEMENTS
Each Fund (other than the Treasury Instruments Fund) may only enter into re-
purchase agreements with primary dealers. A repurchase agreement is an agree-
ment under which a Fund purchases securities and the seller agrees to repur-
chase the securities within a particular time at a specified price. Such price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. A
Fund's custodian or sub-custodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure 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. In evaluat-
ing 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 repurchase
agreements entered into by a Fund will be taxable to its shareholders. In ad-
dition, each Fund, 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 bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase when-issued securities and make contracts to purchase
or sell securities for a fixed price at a future date beyond customary settle-
ment time. A Fund is required to hold and maintain in a segregated account
with the Fund's custodian or sub-custodian until three days prior to settle-
ment date, cash or liquid assets, as permitted by applicable law 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 in-
volve 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 in-
creases 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, the Fund may dispose of a when-issued
security or forward commitment prior to settlement if the Adviser deems it ap-
propriate 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 each Fund'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 Fund acquiring more than 3% of the voting shares of any other
investment company and a prohibition on investing more than 5% of a Fund's as-
sets in securities of any one investment company or more than 10% of its as-
sets in securities of all investment companies. Each Fund will indirectly bear
its proportionate share of any management fees and other expenses paid by such
other investment companies. Goldman Sachs will not impose a portion of the
management fees payable by a Fund (the "Acquiring Fund") with respect to as-
sets invested in another money market investment company (the "Acquired Fund")
as follows. The amount of the management fees otherwise payable by the Acquir-
ing Fund and not imposed by Goldman Sachs will be equal to the amount of man-
agement fees indirectly paid by the Acquiring Fund as a shareholder of the Ac-
quired Fund. Such other investment companies will have investment objectives,
policies and restrictions substantially similar to those of the Acquiring Fund
and will be subject to substantially the same risks.
19
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT FUNDS. Pursuant to Rule 2a-7 under the Investment
Company Act, each Taxable Fund and Tax-Exempt Fund may not invest more than 5%
of its total assets (taken at amortized cost) in the securities of any one is-
suer (except U.S. Government Securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee). Each of
such Funds 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. With respect to 75% of each Fund's assets, not
more than 10% of such Fund's total assets may be invested in securities issued
by or subject to demand features or guarantees from the same issuer. A
Tax-Exempt Funds investment in conduit securities (Municipal Securities pro-
viding for repayment by a person other than the municipal issuer) which are
Second Tier securities are limited to 5% of the Fund's total assets (1% per
issuer). The foregoing operating policies are more restrictive than the funda-
mental policy set forth in the Statement of Additional Information.
INVESTMENT RESTRICTIONS. Each Fund is subject to certain investment restric-
tions that are described in detail under "Investment Restrictions" in the
Statement of Additional Information. Fundamental investment restrictions of a
Fund cannot be changed without approval of a majority of the outstanding
shares of that Fund. Treasury Obligations Fund's policy of limiting its in-
vestments to U.S. Treasury Obligations and related repurchase agreements is
also fundamental. All investment objectives and policies not specifically des-
ignated as fundamental are non-fundamental and may be changed without share-
holder approval.
RESTRICTED AND OTHER ILLIQUID SECURITIES. Each Fund may purchase securities
that are not registered ("restricted securities") under the Securities Act of
1933 ("1933 Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of its net assets in illiquid investments, which include fixed
time deposits maturing in more than seven days and restricted securities.
Restricted securities (including commercial paper issued pursuant to Section
4(2) of the 1933 Act) which the Board of Trustees has determined are liquid,
based upon a continuing review of the trading markets for the specific re-
stricted security, will not be deemed to be illiquid investments for purposes
of this restriction. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring the liquidity
of restricted securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance that the market for restricted securities eligible
for resale under Rule 144A will continue to be liquid, the Adviser will care-
fully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buy-
ers become for a time uninterested in purchasing these restricted securities.
In addition, each Fund 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 Fund (taken at market
value) would be invested in such investments. 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.
20
<PAGE>
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York, a separate operating division
of Goldman Sachs, acts as investment adviser to the Funds. Goldman Sachs reg-
istered as an investment adviser in 1981. As of March , 1997, Goldman Sachs,
together with its affiliates, acted as investment adviser, administrator or
distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable Fund may enter into principal trans-
actions in certain taxable money market instruments, including repurchase
agreements, with Goldman Sachs.
Under the Management Agreements, GSAM continually manages each Fund, includ-
ing the purchase, retention and disposition of its securities and other as-
sets. In addition GSAM administers each Fund's business affairs and performs
various shareholder servicing functions to the extent not provided by other
organizations. The management of each Fund is subject to the supervision of
the Trustees and each Fund's investment policies. For these services, the
Trust, on behalf of each Fund, pays GSAM a monthly fee at an annual rate of
each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
COMBINED ADVISORY AND
ADMINISTRATIVE
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- ---------------------
<S> <C> <C>
Financial Square Prime
Obligations Fund....... .205% .17%
Financial Square Money
Market Fund............ .205% .17%
Financial Square Trea-
sury Obligations Fund.. .205% .17%
Financial Square Trea-
sury Instruments Fund.. .205% .17%
Financial Square Tax
Free Money Market Fund. .205% .17%
Financial Square Govern-
ment Fund.............. .205% N/A%
Financial Square Federal
Fund................... .205% N/A%
Financial Square Munici-
pal Money Market Fund.. .205% N/A%
Financial Square Money
Market Plus Fund....... .205% N/A%
</TABLE>
The difference, if any, between the stated advisory fee and the actual fees
paid by the Funds reflects the fact that GSAM did not charge the full amount
of advisory fees to which it would have been entitled. The combined rate paid
for the fiscal year ended December 31, 1996 includes .04% and .13% paid pursu-
ant to separate advisory and administration agreements.
GSAM has agreed not to impose all or a portion of its advisory fee and/or to
reduce or otherwise limit the total operating expenses of each Fund (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) on
an annualized basis to 0.18% of the Fund's average daily net assets. Such re-
ductions or limits are calculated monthly on a cumulative basis. GSAM has no
current intention to but may discontinue or modify any of such reductions or
limitations at its discretion.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, serves as the Dis-
tributor of shares of each Fund pursuant to a Distribution Agreement with the
Trust. The Distributor will assist in the sale of shares of each Fund upon the
terms described herein. Goldman Sachs also serves as the Transfer Agent of
each Fund.
21
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds in order to increase the assets of the Funds. In-
creasing the Fund's assets may enhance investment flexibility and diversifica-
tion. Goldman Sachs reserves the right to redeem at any time some or all of
the Fund shares acquired for its own account. Goldman Sachs will consider the
effect of redemptions on the Funds and other shareholders in deciding whether
to redeem its shares.
TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
The Treasury Instruments and Federal Funds intend to elect and each other Fund
has elected to be treated as a regulated investment company and each Fund in-
tends to continue to qualify for such treatment under Subchapter M of the In-
ternal Revenue Code of 1986 (the "Code") for each taxable year. To qualify as
such, each 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, each 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 cer-
tain timing requirements of the Code.
Dividends paid by a Fund 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 shareholders as ordinary
income, except for any "exempt-interest dividends" paid by Tax-Free Fund and
Municipal Fund, as described below. 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 gain regardless of how long the shareholders have held
their shares. These tax consequences will apply to distributions of any Fund
regardless of whether distributions are received in cash or reinvested in
shares. Certain distributions paid by the Funds in January of a given year
will be taxable to shareholders as if received on December 31 of the year in
which they are declared. Shareholders will be informed annually about the
amount and character of distributions received from the Funds for federal
income tax purposes, including any distributions that may constitute a return
of capital or any distributions of Municipal Fund that may constitute a tax
preference item under the federal alternative minimum tax.
The Tax-Exempt Funds intend to satisfy certain requirements of the Code for
the payment of "exempt-interest dividends" not included in shareholders' fed-
eral gross income. Dividends paid by these Funds from interest on tax-exempt
obligations and properly designated by the Funds as exempt-interest dividends,
including dividends attributable to exempt-interest dividends received by a
Fund from other regulated 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 social security or railroad retirement benefits are taxable.
Persons who are "substantial users" of facilities financed by certain indus-
trial development or private activity bonds should consult their own tax ad-
visers before purchasing shares of these Funds. Interest incurred to purchase
or carry shares of these Funds will not be deductible for federal income tax
purposes to the extent related to exempt-interest dividends paid by the Funds.
Individuals and certain other classes of shareholders 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 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 ordi-
nary dividends from the Funds.
22
<PAGE>
If a Fund invests in foreign securities, it may be subject to foreign with-
holding or other foreign taxes on income earned on such securities and is ex-
pected to be unable to pass such taxes through to shareholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from a Fund. A state income (and possi-
bly local income and/or intangible property) tax exemption is generally avail-
able to the extent 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 obliga-
tions issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their own tax advisers concerning these matters.
NET ASSET VALUE
The net asset value of each Fund (other than the Government and Treasury Ob-
ligations Funds) 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.
The net asset value of Government and Treasury Obligations Funds is determined
as of 5:00 p.m. New York time on each Business Day. Net asset value per share
for each class of shares of each Fund is calculated by determining the amount
of net assets attributable to each class of shares and dividing by the number
of shares for such class.
On any Business Day, as defined herein, when the Public Securities Associa-
tion ("PSA") recommends that the securities market close early, each Fund re-
serves the right to cease accepting purchase and redemption orders for same
Business Day credit at the time PSA recommends that the securities market
close. On days any Fund closes early, purchases and redemption orders received
after the PSA recommended closing time will be credited to the next Business
Day. In addition, each Fund reserves the right to advance the time by which
purchase and redemption orders must be received for same Business Day credit
as permitted by the SEC.
Each Fund seeks to maintain a net asset value of $1.00 per share. In this
connection, each Fund values its portfolio securities on the basis of amor-
tized cost. The amortized cost method values a security at its cost on the
date of purchase and thereafter assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. For a more complete description
of the amortized cost valuation method and its effect on existing and prospec-
tive shareholders, see the Statement of Additional Information. There can be
no assurance that a Fund will be able at all times to maintain a net asset
value per share of $1.00.
YIELD INFORMATION
From time to time, each Fund may advertise its yield, effective yield and
average annual total return. Average annual total return is determined by com-
puting the average annual percentage change in value of $1,000 invested at the
maximum public offering price for 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 relevant period. Each Fund may furnish total return calcula-
tions based on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules. In ad-
dition to the above, each Fund may from time to time advertise its performance
relative to certain rankings or indices. The yield of a Fund refers to the in-
come generated by an investment in that Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized;
that is, the amount of income generated by the investment during that week is
assumed to be generated each week
23
<PAGE>
over a 52-week period and is shown as a percentage of the investment. The ef-
fective yield is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed 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 Funds and the Federal and Treasury Instruments Funds may each
also quote tax-equivalent yield. Each Fund's tax-equivalent yield is calcu-
lated 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 Fund's
yield, assuming certain tax brackets for a shareholder.
Investors should note that the investment results of a Fund are based on
historical performance and will fluctuate over time. Any presentation of a
Fund's yield, effective yield or tax-equivalent yield for any prior period
should not be considered a representation of what an investment may earn or
what a Fund's yield, effective yield or tax-equivalent yield may be in any fu-
ture period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately for each class of shares in existence. Because each such class of
shares is subject to different expenses, the net yield of such classes of a
Fund for the same period may differ. See "Organization and Shares of the
Trust" below.
ORGANIZATION AND 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 se-
ries of Goldman Sachs Money Market Trust, a Massachusetts business trust and
were reorganized into the Trust as of May 1, 1997. The Trustees of the Trust
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 of
the Trust have authority 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 have authorization to classify or re-
classify any series or portfolio of shares into one or more classes. The
Trustees have authorized the issuance of four classes of shares of each of the
Funds, which are: FST Shares, FST Preferred Shares, FST Administration Shares
and FST Service Shares. (Institutions that provide services to holders of FST
Preferred Shares, FST Administration Shares or FST Service Shares are referred
to in this Prospectus as "Service Organizations").
When issued, shares are fully paid and nonassessable. In the event of liqui-
dation, shareholders are entitled to share pro rata in the net assets of the
applicable Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share (but may, at the discretion of the
Trustees, be voted on a net asset value basis), have noncumulative voting
rights, are freely transferable and have no preemptive, subscription or con-
version rights.
Shares of a Fund will be voted separately by Fund with respect to matters
pertaining to that Fund except for the election of Trustees and ratification
of independent accountants. For example, shareholders of each Fund are re-
quired to approve the adoption of any investment advisory agreement relating
to that Fund and any changes in fundamental investment restrictions or poli-
cies of such Fund. Approval by the shareholders of one Fund is effective only
as to that Fund.
24
<PAGE>
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, com-
municate with other shareholders in connection with requiring a special meet-
ing of shareholders. The Trustees, however, 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.
25
<PAGE>
ADMINISTRATION
Each Fund has adopted an Administration Plan with respect to the FST Admin-
istration Shares which authorizes it to compensate certain institutions for
providing account administration services to their customers who are benefi-
cial owners of such Shares ("Service Organizations"). Each Fund will enter
into agreements with Service Organizations which purchase FST Administration
Shares on behalf of their customers ("Service Agreements"). The Service Agree-
ments will provide for compensation to the Service Organization in an amount
up to .25% (on an annualized basis) of the average daily net asset value of
the FST Administration Shares of that Fund attributable to or held in the name
of the Service Organization for its customers. The services provided by a
Service Organization may include acting, directly or through an agent, as the
sole shareholder of record, maintaining account records for its customers, and
processing orders to purchase and redeem FST Administration Shares for its
customers.
For the fiscal year ended December 31, 1996, the Trust, on behalf of the
Prime Obligations Fund, Money Market Fund, Treasury Obligations Fund, Govern-
ment Fund, and Tax-Free Fund, paid Service Organizations fees at the annual
rate of .25% of each Fund's average daily net assets attributable to FST Ad-
ministration Shares.
Holders of FST Administration Shares of a Fund will bear all expenses and
fees paid to Service Organizations with respect to such Shares as well as any
other expenses which are directly attributable to such Shares.
Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of FST Administration 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 an investor's return with respect to an investment in a Fund.
All inquiries of beneficial owners of FST Administration Shares of the Funds
should be directed to such owners' Service Organization.
PURCHASE OF SHARES
It is expected that all direct purchasers of FST Administration Shares will
be Service Organizations or their nominees, which may purchase FST Administra-
tion Shares of the Funds through Goldman Sachs. Customers of Service Organiza-
tions may invest in such shares only through their Service Organizations.
As set forth below, FST Administration Shares of the Funds may be purchased
on any Business Day at the net asset value next determined after receipt from
the Service Organization of both the purchase order and the purchase price in
Federal Funds. Purchase orders may be made by telephoning Goldman Sachs at
800-621-2550 or by a written request addressed to Goldman Sachs, Attention:
Shareholder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606. It is strongly recommended that payment be effected by wiring Federal
Funds to The Northern Trust Company ("Northern"), Chicago, Illinois, as the
sub-custodian for State Street Bank and Trust Company ("State Street").
Purchases of FST Administration Shares may also be made by a Service Organi-
zation by delivering a Federal Reserve draft or check (except that a third
party check will not be accepted) payable to the appropriate Fund and drawn on
a U.S. bank to Goldman Sachs, Attention: Shareholder Services, Goldman Sachs
Trust, 4900 Sears Tower, Chicago, Illinois 60606. It is expected that Federal
Reserve drafts will ordinarily be converted to
25
<PAGE>
Federal Funds on the day of receipt and that checks will be converted to Fed-
eral Funds within two Business Days after receipt. FST Administration Shares
purchased by check may not be redeemed until the check has cleared, as de-
scribed under "Redemption of Shares."
Purchases of shares of any Fund may also be made through an Automated Clear-
ing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
FST Administration Shares of each Fund are deemed to have been purchased
when an order becomes effective and are entitled to dividends on FST Adminis-
tration Shares purchased as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED FROM A SERVICE
ORGANIZATION BY GOLDMAN SACHS DIVIDENDS BEGIN
----------------------------------- ---------------
<C> <S> <C>
(1) In the case of Taxable Funds (except
for Government and Treasury Obligations
Funds)
By: 3:00 p.m.--N.Y. time Same Business Day
- ------------------------------------------------------------------------
After: 3:00 p.m.--N.Y. time Next Business Day
- ------------------------------------------------------------------------
(2) In the case of Government and Treasury
Obligations Funds
By: 5:00 p.m.--N.Y. time Same Business Day
- ------------------------------------------------------------------------
After: 5:00 p.m.--N.Y. time Next Business Day
- ------------------------------------------------------------------------
(3) In the case of Municipal Fund
By: 1:00 p.m.--N.Y. time Same Business Day
- ------------------------------------------------------------------------
After: 1:00 p.m.--N.Y. time Next Business Day
- ------------------------------------------------------------------------
(4) In the case of Tax-Free Fund
By: 2:00 p.m.--N.Y. time Same Business Day
- ------------------------------------------------------------------------
After: 2:00 p.m.--N.Y. time Next Business Day
- ------------------------------------------------------------------------
</TABLE>
26
<PAGE>
The Service Organizations are responsible for timely transmittal of pur-
chase orders to Goldman Sachs and Federal Funds to Northern. In order to fa-
cilitate timely transmittal, the Service Organizations have established times
by which purchase orders and Federal Funds must be received by them.
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.
FST Administration Shares of a Fund are purchased at the net asset value per
share without the imposition of a sales charge. Goldman Sachs, as each Fund's
transfer agent, will maintain a complete record of transactions and FST Admin-
istration Shares held in each record holder's account. The Trust and Goldman
Sachs each reserves the right to reject any purchase order for any reason.
MINIMUM INVESTMENT AND OTHER INFORMATION
The minimum requirement for investing in a Fund is $50 million ($10 million
if an investor satisfies the minimum initial investment in any other Fund).
The Trust and Goldman Sachs each reserves the right to waive the minimum in-
vestment requirement. A Service Organization may impose a minimum amount for
initial and subsequent investments in FST Administration Shares of the Funds,
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 Organizations for further information concerning
such requirements and charges. A Service Organization may purchase FST Admin-
istration Shares in connection with sweep account programs.
SUBSEQUENT INVESTMENTS
There is no minimum amount required for subsequent investments. Orders for
the purchase of additional FST Administration Shares should be accompanied by
information identifying the account in which FST Administration Shares are to
be purchased.
REPORTS TO SHAREHOLDERS
The Trust will issue an annual report containing audited financial state-
ments and a semi-annual report to record holders of FST Administration Shares
of each Fund, including Service Organizations who hold such Shares for the
benefit of their customers. Upon request, a printed confirmation for each
transaction will be provided by Goldman Sachs. Any dividends and distributions
paid by the Funds are also reflected in regular statements issued by Goldman
Sachs to shareholders of record. Service Organizations will be responsible for
providing similar services to their own customers who are the beneficial own-
ers of such Shares.
DISTRIBUTIONS
All or substantially all of each Fund's net investment income will be de-
clared daily (as of 4:00 p.m. New York time for each Fund other than Govern-
ment Fund and Treasury Obligations Fund and as of 5:00 p.m. New York time for
Government Fund and Treasury Obligations Fund) as a dividend and distributed
to Service Organizations monthly. Distributions will be made in additional FST
Administration Shares of the same Fund or, at the election of a Service Organ-
ization, in cash. The election to reinvest dividends and distributions or re-
ceive them in cash may be changed by a Service Organization at any time upon
written notice to Goldman
27
<PAGE>
Sachs. If no election is made, all dividends 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 capital gains, if any, will be distributed
in accordance with the requirements of the Code and may be reflected in the
Fund's daily distributions. Each Fund may distribute at least annually its
long-term capital gains, if any, after reduction by available capital losses.
In order to avoid excessive fluctuations in the amount of monthly capital
gains distributions, a portion of any net capital gains realized on the dispo-
sition of securities during the months of November and December may be dis-
tributed during the subsequent calendar year. Although realized gains and
losses on the assets of a Fund are reflected in the net asset value of the
Fund, they are not expected to be of an amount which would affect the Fund's
net asset value of $1.00 per share.
The income declared as a dividend for the Treasury Obligations Fund is based
on estimates of net investment income for the Fund. Actual income may differ
from estimates, and differences, if any, will be included in the calculation
of subsequent dividends.
A Fund's net investment income consists of the excess of (i) accrued inter-
est or discount (including both original issue and market discount on taxable
securities) on portfolio securities, and (ii) any income of the Fund from
sources other than capital gains over (iii) the amortization of market premium
on all portfolio securities and (iv) the estimated expenses of the Fund, in-
cluding a proportionate share of the general expenses of the Trust.
EXCHANGES
FST Administration Shares of each Fund may be exchanged by Service Organiza-
tions for shares of the corresponding class of any Fund or Portfolio of
Goldman Sachs Trust at the net asset value next determined either by writing
to Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606 or, by calling Goldman Sachs at 800-621-
2550. All telephone exchanges must be registered in the same name(s) and with
the same address as are registered in the Fund from which the exchange is be-
ing made. It may be difficult to implement the telephone exchange privilege in
times of drastic economic or market changes. In an effort to prevent unautho-
rized or fraudulent exchange requests by telephone, Goldman Sachs employs rea-
sonable procedures as set forth under "Redemption of Shares" to confirm that
such instructions are genuine. Exchanges are available only in states where
the exchange may legally be made. The exchange privilege may be modified or
withdrawn at any time on 60 days' written notice.
REDEMPTION OF SHARES
HOW TO REDEEM
Customers of Service Organizations may redeem FST Administration Shares of a
Fund through their respective Service Organizations. The Service Organizations
are responsible for the transmittal of redemption requests by their customers
to Goldman Sachs. In order to facilitate timely transmittal of redemption re-
quests, Service Organizations have established procedures by which redemption
requests must be made and times by which redemption requests must be received
by them. Additional documentation may be required when deemed appropriate by a
Service Organization.
A Service Organization may redeem such Shares without charge upon request on
any Business Day at the net asset value next determined after receipt by
Goldman Sachs of the redemption request. Redemption requests may be made by
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. It may be difficult to implement redemp-
tions by telephone in times of drastic economic or market changes.
28
<PAGE>
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If reasonable procedures are not implement-
ed, the Trust may be liable for any loss due to unauthorized or fraudulent
transactions. In all other cases, neither the Trust nor Goldman Sachs will be
responsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Funds by means of
the check redemption privilege described in the Statement of Additional Infor-
mation. Goldman Sachs reserves the right to redeem accounts with balances be-
low $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs by the Service
Organization. The payment of redemption proceeds for FST Administration Shares
recently purchased by check will be delayed for up to 15 days until the check
has cleared.
29
<PAGE>
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
record holder of FST Administration Shares.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION REQUEST
RECEIVED FROM REDEMPTION
SERVICE ORGANIZATION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
-------------------- ---------- ---------
<C> <S> <C>
(1) In the case of Taxable Funds (except for Government and Treasury Obliga-
tions Funds)
By:3:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- -----------------------------------------------------------------------------
After:3:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- -----------------------------------------------------------------------------
(2) In the case of the Government and Treasury Obligations Funds
By:5:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- -----------------------------------------------------------------------------
After:5:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- -----------------------------------------------------------------------------
(3) In the case of Tax-Free Fund
By:1:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- -----------------------------------------------------------------------------
After:1:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- -----------------------------------------------------------------------------
(4) In the case of the Municipal Fund
By:12:00 noon--N.Y. time Wired Same Business Day Not earned on Day
request is received
- -----------------------------------------------------------------------------
After:12:00 noon--N.Y. time Wired Next Business Day Earned on Day
request is received
- -----------------------------------------------------------------------------
</TABLE>
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired as Federal Funds to the Service Organization's bank account desig-
nated in the Account Information Form. Redemption proceeds will normally be
wired as set forth above, but may be paid up to three Business Days after re-
ceipt of the Service Organization's properly executed redemption request. For
example, payment may be delayed if the Federal Reserve Bank is closed on the
day redemption proceeds would ordinarily be wired. After a wire has been ini-
tiated by Goldman Sachs, neither Goldman Sachs nor the Trust assumes any fur-
ther responsibility for the performance of intermediaries or the FST Adminis-
tration Shareholder's Service Organization in the transfer process. If a prob-
lem with such performance arises, the FST Administration Shareholder should
deal directly with such intermediaries or Service Organization.
30
<PAGE>
OTHER REDEMPTION INFORMATION
A minimum account balance of $50 million in a Fund ($10 million if an in-
vestor satisfies the minimum initial investment in any other Fund) is required
to remain a FST Administration Shareholder. A Fund may redeem all of the FST
Administration Shares of any FST Administration Shareholder whose account in
that Fund has a net asset value which is less than the minimum described above.
The Trust will give sixty (60) days' prior written notice to such Shareholders
whose FST Administration Shares are being redeemed to allow them to purchase
sufficient additional FST Administration Shares of the Fund to avoid such re-
demption.
----------------
31
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FST ADMINISTRATION SHARES
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder and Fund Expenses..............................................
Financial Highlights.......................................................
An Introduction to the Funds...............................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Shares of the Trust.......................................
Administration.............................................................
Purchase of Shares.........................................................
Reports to Shareholders....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Shares.......................................................
</TABLE>
FST-1AD-MMT15K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST ADMINISTRATION SHARES
-----------
PROSPECTUS
-----------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST SERVICE SHARES
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is no-load, open-end, management invest-
ment company (a "mutual fund") which includes the Financial Square Funds (the
"Funds"). This Prospectus relates only to the offering of FST Service shares
of beneficial interest ("FST Service Shares") of the Funds. Goldman Sachs As-
set Management, a separate operating division of Goldman, Sachs & Co., serves
as each Fund's investment adviser. Goldman, Sachs & Co. serves as each Fund's
distributor and transfer agent.
The following Funds seek 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 Funds may invest in
diversified portfolios of the following types of instruments:
Financial Square Prime Obligations Fund. 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.
Financial Square Money Market Fund. Securities of the U.S. Government, its
agencies, authorities and instrumentalities, U.S. dollar denominated obliga-
tions of U.S. and foreign banks, U.S. dollar denominated commercial paper and
other short-term obligations of U.S. and foreign companies, foreign govern-
ments, states, municipalities and other entities, and repurchase agreements.
Financial Square Money Market Plus Fund. Securities of the U.S. Government,
its agencies, authorities and instrumentalities, U.S. dollar denominated obli-
gations of U.S. and foreign banks, U.S. dollar denominated commercial paper
and other short-term obligations of U.S. and foreign companies, foreign gov-
ernments, states, municipalities and other entities, and repurchase agree-
ments. In order to obtain a rating from a rating organization, the Fund will
observe special investment restrictions.
Financial Square Treasury Obligations Fund. Securities issued or guaranteed
by the U.S. Treasury and repurchase agreements relating to such securities.
Financial Square Treasury Instruments Fund. Securities issued or guaranteed
by the U.S. Treasury.
Financial Square Government Fund. Securities of the U.S. Government, its
agencies, authorities, and instrumentalities, and repurchase agreements relat-
ing to such securities.
Financial Square Federal Fund. Securities of the U.S. Government and certain
of its agencies, authorities and instrumentalities, the interest income from
which is generally exempt from state income taxation.
Financial Square Tax-Free Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes and
not an item of tax preference under the federal alternative minimum tax.
Financial Square Municipal Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes (but
not necessarily exempt from federal alternative minimum tax or state and local
taxes).
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT AND THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION..... Goldman Sachs Mutual Funds--Toll Free: 800-621-2550
This Prospectus provides you with information about the Funds that you should
know before investing in FST Service Shares. It should be read and retained
for future reference. If you would like more detailed information, the State-
ment of Additional Information dated May 1, 1997, as amended or supplemented
from time to time, is available upon request without charge from Service Orga-
nizations, as defined herein, or by calling the telephone number listed above
or by writing Goldman, Sachs & Co., 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 Commis-
sion. Not all Funds are available in certain states. Please call the phone
number listed above to determine availability in your state.
- -------------------------------------------------------------------------------
FST SERVICE SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED 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 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 May 1, 1997
<PAGE>
SHAREHOLDER AND FUND EXPENSES (NOTE 1)
FST SERVICE SHARES (NOTE 2)
<TABLE>
<CAPTION>
FINANCIAL FINANCIAL FINANCIAL
FINANCIAL FINANCIAL SQUARE FINANCIAL FINANCIAL SQUARE SQUARE
SQUARE SQUARE MONEY SQUARE SQUARE FINANCIAL FINANCIAL TAX-FREE MUNICIPAL
PRIME MONEY MARKET TREASURY TREASURY SQUARE SQUARE MONEY MONEY
OBLIGATIONS MARKET PLUS OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET MARKET
FUND FUND FUND FUND FUND FUND FUND FUND FUND
----------- --------- --------- ----------- ----------- ---------- --------- --------- ---------
<S> <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
Sales Charge Imposed
on Reinvested
Distributions....... None None None None None None None None None
Deferred Sales Load
Imposed on
Redemptions......... None None None None None None None None None
Exchange Fee......... None None None None None None None None None
ANNUAL OPERATING
EXPENSES (as a
percentage of average
daily net assets)
Management Fees
(Note 3) (after
adjustments) ....... 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17%
Other Expenses
Service Fees
(Note 4)............ 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Other Expenses (after
expense limitations)
(Note 3)............ 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES (Note 3).... 0.68% 0.68% 0.68% 0.68% 0.68% 0.68% 0.68% 0.68% 0.68%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Financial Square Prime Obligations Fund... $ $ $ $
Financial Square Money Market Fund........ $ $ $ $
Financial Square Money Market Plus Fund... $ $ N/A N/A
Financial Square Treasury Obligations
Fund..................................... $ $ $ $
Financial Square Treasury Instruments
Fund..................................... $ $ N/A N/A
Financial Square Government Fund.......... $ $ $ $
Financial Square Federal Fund............. $ $ N/A N/A
Financial Square Tax-Free Money Market
Fund..................................... $ $ $ $
Financial Square Municipal Money Market
Fund..................................... $ $ N/A N/A
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the var-
ious costs and expenses that an investment in the Funds will bear directly
or indirectly. Operating expenses for Financial Square Money Market Plus
Fund, Financial Square Municipal Money Market Fund, Financial Square Fed-
eral Fund and Financial Square Treasury Instruments Fund are based on es-
timates of expenses expected to be incurred during the fiscal year ending
December 31, 1997. Operating expenses for the other Funds are based on ac-
tual amounts incurred during the fiscal year ended December 31, 1996.
These expenses are expected to be incurred on an ongoing basis. The table
and hypothetical example should not be considered a representation of past
or future expenses; actual expenses may vary depending upon a variety of
factors including the actual performance of each Fund, which may be
greater or less than 5%. See "Management." Investors should be aware that,
due to service fees, a long-term shareholder in a Fund may pay over time
more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Deal-
ers, Inc.
(2) The information set forth in the foregoing table and example relates only
to FST Service Shares of the Funds. The Funds also offer FST Shares, FST
Preferred Shares and FST Administration Shares which are subject to dif-
ferent fees and expenses (which affect performance), have different mini-
mum investment requirements and are entitled to different services. Infor-
mation regarding any other class of the Funds may be obtained from your
sales representative or from Goldman Sachs by calling the number on the
front cover of this Prospectus. See "Organization and Shares of the
Trust."
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed that a
portion of its fee will not be imposed. In addition, the Adviser has
agreed to reduce or otherwise limit certain expenses of each Fund (exclud-
ing fees payable to Service Organizations, as defined herein, taxes, in-
terest and brokerage and litigation, indemnification and other extraordi-
nary expenses), on an annualized basis, to .18% of such Fund's average
daily net assets. The following table sets forth the expenses payable by
each Fund not reflecting the reduction of fees otherwise payable and any
expense limitations:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT SERVICE OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- ------- -------- ---------
<S> <C> <C> <C> <C>
Financial Square Prime Obligations
Fund................................. 0.205% 0.50% % %
Financial Square Money Market Fund.... 0.205% 0.50% % %
Financial Square Money Market Plus
Fund................................. 0.205% 0.50% % %
Financial Square Treasury Obligations
Fund................................. 0.205% 0.50% % %
Financial Square Treasury Instruments
Fund................................. 0.205% 0.50% % %
Financial Square Government Fund...... 0.205% 0.50% % %
Financial Square Federal Fund......... 0.205% 0.50% % %
Financial Square Tax-Free Money Market
Fund................................. 0.205% 0.50% % %
Financial Square Municipal Money Mar-
ket Fund............................. 0.205% 0.50% % %
</TABLE>
(4) Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of FST Service Shares in
connection with their customers' accounts. See "Additional Services." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a share (of the class specified) of the
Financial Square Prime Obligations, Financial Square Money Market, Financial
Square Treasury Obligations, Financial Square Government and Financial Square
Tax-Free Money Market Funds outstanding during the periods indicated have been
audited by independent auditors, as indicated in their report incorpo-
rated by reference and attached to the Statement of Additional Information
from the annual report to shareholders for the fiscal year ended December 31,
1996 (the "Annual Report"), and should be read in conjunction with the finan-
cial statements and related notes incorporated by reference and attached to
the Statement of Additional Information.
Financial Square Municipal Money Market, Financial Square Money Market Plus,
Financial Square Federal and Financial Square Treasury Instruments Funds had
no operations during the fiscal year ended December 31, 1996. Accordingly,
there are no selected per share data and ratios presented for these Funds.
4
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- -------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- -------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- -------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- -------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
9
<PAGE>
AN INTRODUCTION TO THE FUNDS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment Company Act"). Each Fund 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 Funds' investment ad-
viser (the "Adviser" or "GSAM").
THE DISTRIBUTOR: Goldman Sachs, which serves as the Funds' distributor and
transfer agent, is one of the largest international investment banking and
brokerage firms in the United States.
THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value and convenient liquidation priv-
ileges. The Funds are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers. Shares of the Government Fund
are intended to qualify as eligible investments for Federally chartered credit
unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit
Union Act, Part 703 of the National Credit Union Administration ("NCUA") Rules
and Regulations and NCUA Letter Number 155. The Fund intends to review changes
in the applicable laws, rules and regulations governing eligible investments
for federally chartered credit unions, and to take such action as may be nec-
essary so that the investments of the Fund qualify as eligible investments un-
der the Federal Credit Union Act and the regulations thereunder. Shares of the
Government Fund, however, may or may not qualify as eligible investments for
particular state chartered credit unions. State chartered credit unions should
consult qualified legal counsel to determine whether the Government Fund is a
permissible investment under the law applicable to it.
THE FUNDS: Each Fund'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 Fund may invest only in securities that are de-
termined to present minimal credit risk and meet certain other criteria.
TAXABLE FUNDS: Prime Obligations, Money Market, Money Market Plus, Trea-
sury Obligations, Government, Treasury Instruments and Federal Funds.
TAX-EXEMPT FUNDS: Tax-Free Money Market and Municipal Money Market Funds.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE FUNDS AND TAX-EXEMPT
FUNDS: To maximize current income to the extent consistent with the preser-
vation of capital and the maintenance of liquidity by investing exclusively
in high quality money market instruments. In order to obtain a rating from
a rating organization, the Money Market Plus Fund will observe special in-
vestment restrictions. The Treasury Instruments and Federal Funds pursue
their objectives by limiting their investments to certain U.S. Treasury Ob-
ligations and U.S. Government Securities (each as defined herein), respec-
tively, the interest from which is generally exempt from state income taxa-
tion. Each investor should consult his or her tax adviser to determine
whether distributions from the Treasury Instruments and Federal Funds (and
any other Fund that may hold such obligations) derived from interest on
such obligations are exempt from state income taxation in the investor's
own state.
NET ASSET VALUE: Each Fund seeks to maintain a stable net asset value of
$1.00 per share.
MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: Thirteen months at the
time of purchase.
10
<PAGE>
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY: Not more than ninety days.
FIRST TIER SECURITIES: Each Fund 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, comparable 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 defined herein
are considered First Tier Securities.
SECOND TIER SECURITIES: The Tax-Exempt Funds 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 Taxable Funds 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 Fund may purchase Second Tier Securities,
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.
11
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED & FOREIGN
US US OBLIGATIONS CORPORATIONS RECEIVABLES- GOVERNMENT
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED OBLIGATIONS
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES (US$)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Obligations US Banks US Rated
Fund Only Entities Only
Only
- -----------------------------------------------------------------------------------------------------------------------------
Money Market [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Fund Over 25% of US and US and Rated
total assets Foreign Foreign Only
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Money Market
Plus Fund [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Over 25% of US and US and
total assets Foreign Foreign
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [ ] [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Government Fund [ ] [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Municipal Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Federal Fund [ ] [ ] [ ]
(Does
not
intend
to
invest)
</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.
12
<PAGE>
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED SUMMARY OF
MUNICIPALS MUNICIPAL QUALITY**** COMPANIES SECURITIES TAXATION* MISCELLANEOUS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] First [ ] [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May (but does
At least 80% of Second Up to 10% of Federal and not currently
net assets in Tier total assets Taxable intend to)
Municipal in other State*** invest up to 20%
Instruments investment in AMT
(except in companies securities and
extraordinary may temporarily
circumstances) invest in the
taxable money
market
instruments
described herein
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May invest up to
At least 80% of Second Up to 10% of Federal and 100% in AMT
net assets in Tier total assets Taxable securities and
Municipal in other State*** may temporarily
Instruments investment invest in the
(except in companies taxable money
extraordinary market
circumstances) instruments
described herein
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable Under
Tier Up to 10% of Federal and extraordinary
total assets generally circumstances,
in other exempt from may hold cash,
investment state taxation U.S. Government
companies Securities
subject to state
taxation or cash
equivalents
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets generally
in other exempt from
investment state taxation
companies
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Securities interest in many states.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
**** A Fund holding a security fully supported by a guarantee may substitute
the credit quality of the guarantee in determining the credit quality of
the security.
13
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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 Fund may also invest in separately traded principal and interest compo-
nents of securities guaranteed or issued by the U.S. Treasury if such compo-
nents are traded independently under the Separate Trading of Registered Inter-
est and Principal of Securities program ("STRIPS").
The Treasury Instruments and Federal Funds invest in U.S. Treasury Obliga-
tions and certain U.S. Government Securities (including U.S. Treasury Obliga-
tions), respectively, the interest from which is generally exempt from state
income taxation. Securities generally eligible for this exemption include
those issued by the U.S. Treasury and those issued by certain agencies, au-
thorities or instrumentalities of the U.S. Government, including the Federal
Home Loan Banks, Federal Farm Credit Banks, Tennessee Valley Authority and the
Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may also acquire securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities 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. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "U.S. Bank Obligations" limited to securities issued or guaranteed by U.S.
banks (including certificates of deposit, commercial
14
<PAGE>
paper, unsecured bank promissory notes and bankers' acceptances) which have
more than $1 billion in total assets at the time of purchase. Such obligations
may also include debt obligations issued by U.S. subsidiaries of such banks.
The Money Market and Money Market Plus Funds may also invest in "Foreign
Bank Obligations" limited to U.S. dollar denominated obligations issued or
guaranteed (including fixed time deposits) by foreign banks which have more
than $1 billion in total assets at the time of purchase, U.S. branches of such
foreign banks (Yankee obligations), foreign branches of such foreign banks and
foreign branches of U.S. banks having more than $1 billion in total assets at
the time of purchase. Such bank obligations may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the spe-
cific obligations or by government regulation.
The Money Market and Money Market Plus Funds will invest more than 25% of
their total assets in bank obligations (whether foreign or domestic). However,
if adverse economic conditions prevail in the banking industry (such as sub-
stantial losses on loans, increases in non-performing assets and charge-offs
and declines in total deposits) the Funds may, for defensive purposes, tempo-
rarily invest less than 25% of their total assets in bank obligations. As a
result, the Funds may be especially affected by favorable and adverse develop-
ments in or related to the banking industry. The activities of U.S. banks and
most foreign banks are subject to comprehensive regulations which, in the case
of U.S. regulations, have undergone substantial changes in the past decade.
The enactment of new legislation or regulations, as well as changes in inter-
pretation and enforcement of current laws, may affect the manner of operations
and profitability of domestic and foreign banks. Significant developments in
the U.S. banking industry have included deregulation of interest rates, in-
creased competition from other types of financial institutions, increased ac-
quisition activity, geographic expansion and, during the late 1980's, an in-
creased number of bank failures. Banks may be particularly susceptible to cer-
tain economic factors, such as interest rate changes and adverse developments
in the market for real estate. Fiscal and monetary policy and general economic
cycles can affect the availability and cost of funds, loan demand and asset
quality and thereby impact the earnings and financial conditions of banks. See
"Foreign Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Commercial Paper" (including variable amount master demand notes and as-
set-backed commercial paper) which is payable in U.S. dollars and is issued or
guaranteed by U.S. corporations, U.S. commercial banks, foreign corporations
(Money Market and Money Market Plus Funds only), foreign commercial banks
(Money Market and Money Market Plus Funds only) or other entities. In addi-
tion, the Funds 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, foreign corporations (Money Market and Money Market Plus
Funds only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Asset-Backed and Receivables-Backed Securities" which represent participa-
tions in, or are secured by and payable from, pools of assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of var-
ious types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. Such asset pools are
securitized through the use of privately-formed trusts or special purpose cor-
porations. Payments or distributions of principal
15
<PAGE>
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. To the extent con-
sistent with its investment objectives and policies, each of the Prime Obliga-
tions, Money Market and Money Market Plus Funds may invest in new types of
mortgage-related securities and in other asset-backed securities that may be
developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market and Money Market Plus Funds may invest in U.S. dollar de-
nominated obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government or any entity located or organized coun-
tries that maintain a short-term foreign currency rating in the highest short-
term rating categories by at least 2 NRSROs, or if unrated, deemed to be
equivalent by the Trustees. The Money Market and Money Market Plus Funds may
not invest more than 25% of their total assets in the securities of any one
foreign government.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
TYPES OF MUNICIPAL INSTRUMENTS:
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET AND
MUNICIPAL MONEY MARKET FUNDS
-------------------------------------------------------------------------
<S> <C>
FIXED RATE NOTES AND SIMILAR In highest short-term or one of the
DEBT INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
VARIABLE AND FLOATING RATE In highest short-term or one of the
DEMAND INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER In highest rating category
-------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two highest rating
categories
-------------------------------------------------------------------------
UNRATED NOTES, PAPER, BONDS AND Determined to be of comparable quality
OTHER INSTRUMENTS by Adviser pursuant to criteria
approved by the Trustees
</TABLE>
16
<PAGE>
As a matter of fundamental policy, at least 80% of each of the Tax-Free
Money Market and Municipal Money Market Fund's net assets will ordinarily be
invested in Municipal Instruments. Each Tax-Exempt Fund 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 each
Tax-Exempt Fund. The Prime Obligations, Money Market and Money Market Plus
Funds may invest in short-term obligations issued or guaranteed by state and
municipal governments when yields on such securities are attractive compared
to other taxable investments.
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 Fund's average portfolio maturity. There is a risk
that a Fund will not be considered the owner of a tender option bond for fed-
eral 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 Funds to sell them at
par value plus accrued interest
17
<PAGE>
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 consider-
ing whether an obligation meets a Fund's quality standards, the Fund will look
to the creditworthiness of the party providing unconditional demand features
or other unconditional obligations to support the credit of the issuer of the
security. A Fund may consider the maturity of a variable or floating rate Mu-
nicipal Instrument to be shorter than its ultimate stated maturity if the Fund
has the right to demand prepayment of its principal at specified intervals
prior to the security's ultimate stated maturity, subject to the conditions
for using amortized cost valuation under the Investment Company Act. A Fund
may purchase such variable or floating rate obligations 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 Funds (other than the Treasury Obliga-
tions, Treasury Instruments, Government and Federal Funds) may invest in in-
dustrial development bonds (generally referred to under current tax law as
"private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to shareholders un-
der the federal alternative minimum tax. See "Taxes" and "Distributions." Mu-
nicipal Fund may invest up to 100% of its assets in private activity bonds.
Tax-Free Fund does not currently intend to invest in such bonds. If Tax-Free
Fund's policy not to invest in private activity bonds should change in the fu-
ture, shareholders would be notified and such investments would not exceed 20%
of Tax-Free Fund's net assets.
OTHER POLICIES. Ordinarily the Tax-Exempt Funds expect that 100% of their
portfolio securities will be Municipal Instruments. However, the Funds may
hold cash or invest in short-term taxable securities as set forth above. Such
Funds may invest 25% or more of the value of their respective total assets in
Municipal Instruments which are related in such a way that an economic, busi-
ness or political development or change affecting one Municipal Instrument
would also affect the other Municipal Instruments. For example, the Tax Exempt
Funds may invest all of their respective assets in (a) Municipal Instruments
the interest on which is paid solely from revenues from similar projects such
as hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies or life care facili-
ties, (b) Municipal Instruments whose issuers are in the same state or (c) in-
dustrial development obligations. Concentration of a Fund's investments in
these Municipal Instruments will subject the Fund, 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 Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may purchase Municipal Instruments which are backed
by letters of credit, which will ordinarily be irrevocable, issued by domestic
banks or foreign banks (excluding Prime Obligations Fund) which have a branch,
agency or subsidiary in the United States. In addition, these Funds may ac-
quire securities in the form of custodial receipts which evidence ownership 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 Fund (other than the Treasury Obligations, Treasury Instru-
ments, Government and Federal Funds) may acquire the right to sell the secu-
rity to another party at a guaranteed price and date.
18
<PAGE>
REPURCHASE AGREEMENTS
Each Fund (other than the Treasury Instruments Fund) may only enter into re-
purchase agreements with primary dealers. A repurchase agreement is an agree-
ment under which a Fund purchases securities and the seller agrees to repur-
chase the securities within a particular time at a specified price. Such price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. A
Fund's custodian or sub-custodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure 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. In evaluat-
ing 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 repurchase
agreements entered into by a Fund will be taxable to its shareholders. In ad-
dition, each Fund, 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 bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase when-issued securities and make contracts to purchase
or sell securities for a fixed price at a future date beyond customary settle-
ment time. A Fund is required to hold and maintain in a segregated account
with the Fund's custodian or sub-custodian until three days prior to settle-
ment date, cash or liquid assets, as permitted by applicable law 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 in-
volve 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 in-
creases 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, the Fund may dispose of a when-issued
security or forward commitment prior to settlement if the Adviser deems it ap-
propriate 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 each Fund'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 Fund acquiring more than 3% of the voting shares of any other
investment company and a prohibition on investing more than 5% of a Fund's as-
sets in securities of any one investment company or more than 10% of its as-
sets in securities of all investment companies. Each Fund will indirectly bear
its proportionate share of any management fees and other expenses paid by such
other investment companies. Goldman Sachs will not impose a portion of the
management fees payable by a Fund (the "Acquiring Fund") with respect to as-
sets invested in another money market investment company (the "Acquired Fund")
as follows. The amount of the management fees otherwise payable by the Acquir-
ing Fund and not imposed by Goldman Sachs will be equal to the amount of man-
agement fees indirectly paid by the Acquiring Fund as a shareholder of the Ac-
quired Fund. Such other investment companies will have investment objectives,
policies and restrictions substantially similar to those of the Acquiring Fund
and will be subject to substantially the same risks.
19
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT FUNDS. Pursuant to Rule 2a-7 under the Investment
Company Act, each Taxable Fund and Tax-Exempt Fund may not invest more than 5%
of its total assets (taken at amortized cost) in the securities of any one is-
suer (except U.S. Government Securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee). Each of
such Funds 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. With respect to 75% of each Fund's assets, not
more than 10% of such Fund's total assets may be invested in securities issued
by or subject to demand features or guarantees from the same issuer. A
Tax-Exempt Funds investment in conduit securities (Municipal Securities pro-
viding for repayment by a person other than the municipal issuer) which are
Second Tier securities are limited to 5% of the Fund's total assets (1% per
issuer). The foregoing operating policies are more restrictive than the funda-
mental policy set forth in the Statement of Additional Information.
INVESTMENT RESTRICTIONS. Each Fund is subject to certain investment restric-
tions that are described in detail under "Investment Restrictions" in the
Statement of Additional Information. Fundamental investment restrictions of a
Fund cannot be changed without approval of a majority of the outstanding
shares of that Fund. Treasury Obligations Fund's policy of limiting its in-
vestments to U.S. Treasury Obligations and related repurchase agreements is
also fundamental. All investment objectives and policies not specifically des-
ignated as fundamental are non-fundamental and may be changed without share-
holder approval.
RESTRICTED AND OTHER ILLIQUID SECURITIES. Each Fund may purchase securities
that are not registered ("restricted securities") under the Securities Act of
1933 ("1933 Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of its net assets in illiquid investments, which include fixed
time deposits maturing in more than seven days and restricted securities.
Restricted securities (including commercial paper issued pursuant to Section
4(2) of the 1933 Act) which the Board of Trustees has determined are liquid,
based upon a continuing review of the trading markets for the specific re-
stricted security, will not be deemed to be illiquid investments for purposes
of this restriction. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring the liquidity
of restricted securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance that the market for restricted securities eligible
for resale under Rule 144A will continue to be liquid, the Adviser will care-
fully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buy-
ers become for a time uninterested in purchasing these restricted securities.
In addition, each Fund 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 Fund (taken at market
value) would be invested in such investments. 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.
20
<PAGE>
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York, a separate operating division
of Goldman Sachs, acts as investment adviser to the Funds. Goldman Sachs reg-
istered as an investment adviser in 1981. As of March , 1997, Goldman Sachs,
together with its affiliates, acted as investment adviser, administrator or
distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable Fund may enter into principal trans-
actions in certain taxable money market instruments, including repurchase
agreements, with Goldman Sachs.
Under the Management Agreements, GSAM continually manages each Fund, includ-
ing the purchase, retention and disposition of its securities and other as-
sets. In addition GSAM administers each Fund's business affairs and performs
various shareholder servicing functions to the extent not provided by other
organizations. The management of each Fund is subject to the supervision of
the Trustees and each Fund's investment policies. For these services, the
Trust, on behalf of each Fund, pays GSAM a monthly fee at an annual rate of
each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
COMBINED ADVISORY AND
ADMINISTRATIVE
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- ---------------------
<S> <C> <C>
Financial Square Prime
Obligations Fund....... .205% .17%
Financial Square Money
Market Fund............ .205% .17%
Financial Square Trea-
sury Obligations Fund.. .205% .17%
Financial Square Trea-
sury Instruments Fund.. .205% .17%
Financial Square Tax
Free Money Market Fund. .205% .17%
Financial Square Govern-
ment Fund.............. .205% N/A%
Financial Square Federal
Fund................... .205% N/A%
Financial Square Munici-
pal Money Market Fund.. .205% N/A%
Financial Square Money
Market Plus Fund....... .205% N/A%
</TABLE>
The difference, if any, between the stated advisory fee and the actual fees
paid by the Funds reflects the fact that GSAM did not charge the full amount
of advisory fees to which it would have been entitled. The combined rate paid
for the fiscal year ended December 31, 1996 includes .04% and .13% paid pursu-
ant to separate advisory and administration agreements.
GSAM has agreed not to impose all or a portion of its advisory fee and/or to
reduce or otherwise limit the total operating expenses of each Fund (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) on
an annualized basis to 0.18% of the Fund's average daily net assets. Such re-
ductions or limits are calculated monthly on a cumulative basis. GSAM has no
current intention to but may discontinue or modify any of such reductions or
limitations at its discretion.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, serves as the Dis-
tributor of shares of each Fund pursuant to a Distribution Agreement with the
Trust. The Distributor will assist in the sale of shares of each Fund upon the
terms described herein. Goldman Sachs also serves as the Transfer Agent of
each Fund.
21
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds in order to increase the assets of the Funds. In-
creasing the Fund's assets may enhance investment flexibility and diversifica-
tion. Goldman Sachs reserves the right to redeem at any time some or all of
the Fund shares acquired for its own account. Goldman Sachs will consider the
effect of redemptions on the Funds and other shareholders in deciding whether
to redeem its shares.
TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
The Treasury Instruments and Federal Funds intend to elect and each other Fund
has elected to be treated as a regulated investment company and each Fund in-
tends to continue to qualify for such treatment under Subchapter M of the In-
ternal Revenue Code of 1986 (the "Code") for each taxable year. To qualify as
such, each 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, each 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 cer-
tain timing requirements of the Code.
Dividends paid by a Fund 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 shareholders as ordinary
income, except for any "exempt-interest dividends" paid by Tax-Free Fund and
Municipal Fund, as described below. 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 gain regardless of how long the shareholders have held
their shares. These tax consequences will apply to distributions of any Fund
regardless of whether distributions are received in cash or reinvested in
shares. Certain distributions paid by the Funds in January of a given year
will be taxable to shareholders as if received on December 31 of the year in
which they are declared. Shareholders will be informed annually about the
amount and character of distributions received from the Funds for federal
income tax purposes, including any distributions that may constitute a return
of capital or any distributions of Municipal Fund that may constitute a tax
preference item under the federal alternative minimum tax.
The Tax-Exempt Funds intend to satisfy certain requirements of the Code for
the payment of "exempt-interest dividends" not included in shareholders' fed-
eral gross income. Dividends paid by these Funds from interest on tax-exempt
obligations and properly designated by the Funds as exempt-interest dividends,
including dividends attributable to exempt-interest dividends received by a
Fund from other regulated 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 social security or railroad retirement benefits are taxable.
Persons who are "substantial users" of facilities financed by certain indus-
trial development or private activity bonds should consult their own tax ad-
visers before purchasing shares of these Funds. Interest incurred to purchase
or carry shares of these Funds will not be deductible for federal income tax
purposes to the extent related to exempt-interest dividends paid by the Funds.
Individuals and certain other classes of shareholders 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 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 ordi-
nary dividends from the Funds.
22
<PAGE>
If a Fund invests in foreign securities, it may be subject to foreign with-
holding or other foreign taxes on income earned on such securities and is ex-
pected to be unable to pass such taxes through to shareholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from a Fund. A state income (and possi-
bly local income and/or intangible property) tax exemption is generally avail-
able to the extent 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 obliga-
tions issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their own tax advisers concerning these matters.
NET ASSET VALUE
The net asset value of each Fund (other than the Government and Treasury Ob-
ligations Funds) 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.
The net asset value of Government and Treasury Obligations Funds is determined
as of 5:00 p.m. New York time on each Business Day. Net asset value per share
for each class of shares of each Fund is calculated by determining the amount
of net assets attributable to each class of shares and dividing by the number
of shares for such class.
On any Business Day, as defined herein, when the Public Securities Associa-
tion ("PSA") recommends that the securities market close early, each Fund re-
serves the right to cease accepting purchase and redemption orders for same
Business Day credit at the time PSA recommends that the securities market
close. On days any Fund closes early, purchases and redemption orders received
after the PSA recommended closing time will be credited to the next Business
Day. In addition, each Fund reserves the right to advance the time by which
purchase and redemption orders must be received for same Business Day credit
as permitted by the SEC.
Each Fund seeks to maintain a net asset value of $1.00 per share. In this
connection, each Fund values its portfolio securities on the basis of amor-
tized cost. The amortized cost method values a security at its cost on the
date of purchase and thereafter assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. For a more complete description
of the amortized cost valuation method and its effect on existing and prospec-
tive shareholders, see the Statement of Additional Information. There can be
no assurance that a Fund will be able at all times to maintain a net asset
value per share of $1.00.
YIELD INFORMATION
From time to time, each Fund may advertise its yield, effective yield and
average annual total return. Average annual total return is determined by com-
puting the average annual percentage change in value of $1,000 invested at the
maximum public offering price for 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 relevant period. Each Fund may furnish total return calcula-
tions based on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules. In ad-
dition to the above, each Fund may from time to time advertise its performance
relative to certain rankings or indices. The yield of a Fund refers to the in-
come generated by an investment in that Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized;
that is, the amount of income generated by the investment during that week is
assumed to be generated each week
23
<PAGE>
over a 52-week period and is shown as a percentage of the investment. The ef-
fective yield is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed 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 Funds and the Federal and Treasury Instruments Funds may each
also quote tax-equivalent yield. Each Fund's tax-equivalent yield is calcu-
lated 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 Fund's
yield, assuming certain tax brackets for a shareholder.
Investors should note that the investment results of a Fund are based on
historical performance and will fluctuate over time. Any presentation of a
Fund's yield, effective yield or tax-equivalent yield for any prior period
should not be considered a representation of what an investment may earn or
what a Fund's yield, effective yield or tax-equivalent yield may be in any fu-
ture period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately for each class of shares in existence. Because each such class of
shares is subject to different expenses, the net yield of such classes of a
Fund for the same period may differ. See "Organization and Shares of the
Trust" below.
ORGANIZATION AND 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 se-
ries of Goldman Sachs Money Market Trust, a Massachusetts business trust and
were reorganized into the Trust as of May 1, 1997. The Trustees of the Trust
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 of
the Trust have authority 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 have authorization to classify or re-
classify any series or portfolio of shares into one or more classes. The
Trustees have authorized the issuance of four classes of shares of each of the
Funds, which are: FST Shares, FST Preferred Shares, FST Administration Shares
and FST Service Shares. (Institutions that provide services to holders of FST
Preferred Shares, FST Administration Shares or FST Service Shares are referred
to in this Prospectus as "Service Organizations").
When issued, shares are fully paid and nonassessable. In the event of liqui-
dation, shareholders are entitled to share pro rata in the net assets of the
applicable Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share (but may, at the discretion of the
Trustees, be voted on a net asset value basis), have noncumulative voting
rights, are freely transferable and have no preemptive, subscription or con-
version rights.
Shares of a Fund will be voted separately by Fund with respect to matters
pertaining to that Fund except for the election of Trustees and ratification
of independent accountants. For example, shareholders of each Fund are re-
quired to approve the adoption of any investment advisory agreement relating
to that Fund and any changes in fundamental investment restrictions or poli-
cies of such Fund. Approval by the shareholders of one Fund is effective only
as to that Fund.
24
<PAGE>
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, com-
municate with other shareholders in connection with requiring a special meet-
ing of shareholders. The Trustees, however, 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.
25
<PAGE>
ADDITIONAL SERVICES
Each Fund has adopted a Service Plan with respect to the FST Service Shares
which authorizes it to compensate certain institutions for providing account
administration and personal and account maintenance services to their custom-
ers who are beneficial owners of such Shares ("Service Organization"). Each
Fund will enter into agreements with Service Organizations which purchase FST
Service Shares on behalf of their customers ("Service Agreements"). The Serv-
ice Agreements will provide for compensation to the Service Organization in an
amount up to .50% (on an annualized basis) of the average daily net asset
value of the FST Service Shares of that 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
.25% of such average daily net assets. The services provided by a Service Or-
ganization may include acting, directly or through an agent, as the sole
shareholder of record, maintaining account records for its customers, and
processing orders to purchase, redeem and exchange FST Service Shares of a
Fund for its customers, responding to inquiries from prospective and existing
shareholders and assisting customers with investment procedures.
For the fiscal year ended December 31, 1996, the Trust, on behalf of Prime
Obligations Fund, Money Market Fund, Treasury Obligations Fund, Government
Fund and Tax-Free Fund paid Service Organizations fees at the annual rate of
.50% of each Fund's average daily net assets attributable to FST Service
Shares.
Holders of FST Service Shares of a Fund will bear all expenses and fees paid
to Service Organizations with respect to such Shares as well as any other ex-
penses which are directly attributable to such Shares.
Service Organizations (other than broker dealers) may charge other fees to
their customers who are the beneficial owners of FST Service Shares in connec-
tion 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 an investor's return with respect to an investment in a Fund.
All inquiries of beneficial owners of FST Service Shares of the Funds should
be directed to such owners' Service Organization.
PURCHASE OF SHARES
It is expected that all direct purchasers of FST Service Shares will be
Service Organizations or their nominees, which may purchase FST Service Shares
of the Funds through Goldman Sachs. Customers of Service Organizations may in-
vest in such shares only through their Service Organizations.
As set forth below, FST Service Shares of the Funds may be purchased on any
Business Day at the net asset value next determined after receipt from the
Service Organization of both the purchase order and the purchase price in Fed-
eral Funds. Purchase orders may be made by telephoning Goldman Sachs at 800-
621-2550 or by a written request addressed to Goldman Sachs, Attention: Share-
holder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606. It is strongly recommended that payment be effected by wiring Federal
Funds to The Northern Trust Company ("Northern"), Chicago, Illinois, as the
sub-custodian for State Street Bank and Trust Company ("State Street").
Purchases of FST Service Shares may also be made by a Service Organization
by delivering a Federal Reserve draft or check (except that a third party
check will not be accepted) payable only to the appropriate
25
<PAGE>
Fund and drawn on a U.S. bank to Goldman Sachs, Attention: Shareholder Servic-
es, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606. It is ex-
pected 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. FST Service Shares purchased by check
may not be redeemed until the check has cleared, as described under "Redemp-
tion of Shares."
Purchases of shares of any Fund may also be made through an Automated Clear-
ing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
FST Service Shares of each Fund are deemed to have been purchased when an
order becomes effective and are entitled to dividends on FST Service Shares
purchased as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED FROM A
SERVICE
ORGANIZATION BY GOLDMAN SACHS DIVIDENDS BEGIN
----------------------------- ---------------
<S> <C>
(1) In the case of Taxable Funds (except for Government
and Treasury Obligations Funds)
By:3:00 p.m.--N.Y. time Same Business Day
- ----------------------------------------------------------
After:3:00 p.m.--N.Y. time Next Business Day
- ----------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(2) In the case of Government and Treasury Obligations
Funds
By:5:00 p.m.--N.Y. time Same Business Day
- ----------------------------------------------------------------------------
After:5:00 p.m.--N.Y. time Next Business Day
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(3) In the case of Municipal Fund
By:1:00 p.m.--N.Y. time Same Business Day
- -------------------------------------------------------
After:1:00 p.m.--N.Y. time Next Business Day
- -------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
(4) In the case of Tax-Free Fund
By:2:00 p.m.--N.Y. time Same Business Day
- ------------------------------------------------------
After:2:00 p.m.--N.Y. time Next Business Day
- ------------------------------------------------------
</TABLE>
The Service Organizations are responsible for timely transmittal of purchase
orders to Goldman Sachs and Federal Funds to Northern. In order to facilitate
timely transmittal, the Service Organizations have established times by which
purchase orders and Federal Funds must be received by them.
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.
26
<PAGE>
FST Service Shares of a Fund are purchased at the net asset value per share
without the imposition of a sales charge. Goldman Sachs, as each Fund's trans-
fer agent, will maintain a complete record of transactions and FST Service
Shares of each Fund held in each record holder's account. The Trust and
Goldman Sachs each reserves the right to reject any purchase order for any
reason.
MINIMUM INVESTMENT AND OTHER INFORMATION
The minimum requirement for investing in a Fund is $50 million ($10 million
if an investor satisfies the minimum initial investment in any other Fund).
The Trust and Goldman Sachs each reserves the right to waive the minimum in-
vestment requirement. A Service Organization may impose a minimum amount for
initial and subsequent investments in FST Service Shares of the Funds, and may
establish other requirements such as a minimum account balance. A Service Or-
ganization may effect redemptions of noncomplying accounts, and may impose a
charge for any special services rendered to its customers. Customers should
contact their Service Organizations for further information concerning such
requirements and charges. A Service Organization may purchase FST Service
Shares in connection with sweep account programs.
SUBSEQUENT INVESTMENTS
There is no minimum amount required for subsequent investments. Orders for
the purchase of additional FST Service Shares should be accompanied by infor-
mation identifying the account in which FST Service Shares are to be pur-
chased.
REPORTS TO SHAREHOLDERS
The Trust will issue an annual report containing audited financial state-
ments and a semi-annual report to record holders of FST Service Shares of each
Fund, including Service Organizations who hold such Shares for the benefit of
their customers. Upon request, a printed confirmation for each transaction
will be provided by Goldman Sachs. Any dividends and distributions paid by the
Funds are also reflected in regular statements issued by Goldman Sachs to
shareholders of record. Service Organizations will be responsible for provid-
ing similar services to their own customers who are the beneficial owners of
such Shares.
DISTRIBUTIONS
All or substantially all of each Fund's net investment income will be de-
clared daily (as of 4:00 p.m. New York time for each Fund other than Govern-
ment and Treasury Obligations Funds and as of 5:00 p.m. New York time for Gov-
ernment and Treasury Obligations Funds) as a dividend and distributed to Serv-
ice Organizations monthly. Distributions will be made in additional FST Serv-
ice Shares of the same Fund or, at the election of a Service Organization, in
cash. The election to reinvest dividends and distributions or receive them in
cash may be changed by a Service Organization at any time upon written notice
to Goldman Sachs. If no election is made, all dividends and capital gain dis-
tributions 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 capital gains, if any, will
be distributed in accordance with the requirements of the Code and may be re-
flected in the Fund's daily distributions. Each Fund may distribute at least
annually its long-term capital gains, if any, after reduction by available
capital losses. In order to avoid excessive fluctuations in the amount of
monthly capital gains distributions, a portion of any net capital gains real-
ized on the disposition of
27
<PAGE>
securities during the months of November and December may be distributed dur-
ing the subsequent calendar year. Although realized gains and losses on the
assets of a Fund are reflected in the net asset value of the Fund, they are
not expected to be of an amount which would affect the Fund's net asset value
of $1.00 per share.
The income declared as a dividend for the Treasury Obligations Fund is based
on estimates of net investment income for the Fund. Actual income may differ
from estimates, and differences, if any, will be included in the calculation
of subsequent dividends.
A Fund's net investment income consists of the excess of (i) accrued inter-
est or discount (including both original issue and market discount on taxable
securities) on portfolio securities, and (ii) any income of the Fund from
sources other than capital gains over (iii) the amortization of market premium
on all portfolio securities and (iv) the estimated expenses of the Fund, in-
cluding a proportionate share of the general expenses of the Trust.
EXCHANGES
FST Service Shares of each Fund may be exchanged by Service Organizations
for shares of the corresponding class of any Fund or Portfolio of Goldman
Sachs Trust at the net asset value next determined either by writing to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606 or, by calling Goldman Sachs at 800-621-
2550. All telephone exchanges must be registered in the same name(s) and with
the same address as are registered in the Fund from which the exchange is be-
ing made. It may be difficult to implement the telephone exchange privilege in
times of drastic economic or market changes. In an effort to prevent unautho-
rized or fraudulent exchange requests by telephone, Goldman Sachs employs rea-
sonable procedures as set forth under "Redemption of Shares" to confirm that
such instructions are genuine. Exchanges are available only in states where
the exchange may legally be made. The exchange privilege may be modified or
withdrawn at any time on 60 days' written notice.
REDEMPTION OF SHARES
HOW TO REDEEM
Customers of Service Organizations may redeem FST Service Shares of a Fund
through their respective Service Organizations. The Service Organizations are
responsible for the transmittal of redemption requests by their customers to
Goldman Sachs. In order to facilitate timely transmittal of redemption re-
quests, Service Organizations have established procedures by which redemption
requests must be made and times by which redemption requests must be received
by them. Additional documentation may be required when deemed appropriate by a
Service Organization.
A Service Organization may redeem such Shares without charge upon request on
any Business Day at the net asset value next determined after receipt by
Goldman Sachs of the redemption request. Redemption requests may be made by
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. It may be difficult to implement redemp-
tions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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. Other procedures may
be implemented from time to time. If
28
<PAGE>
reasonable procedures are not implemented, the Trust may be liable for any
loss due to unauthorized or fraudulent transactions. In all other cases, nei-
ther the Trust nor Goldman Sachs will be responsible for the authenticity of
redemption instructions received by telephone. A redemption may also be made
with respect to certain Funds by means of the check redemption privilege de-
scribed in the Statement of Additional Information. Goldman Sachs reserves the
right to redeem accounts with balances below $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs by the Service
Organization. The payment of redemption proceeds for FST Service Shares re-
cently purchased by check will be delayed for up to 15 days until the check
has cleared.
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
record holder of FST Service Shares.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION REQUEST RECEIVED
FROM SERVICE ORGANIZATION REDEMPTION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
--------------------------- ------------------- ---------
<S> <C> <C>
(1) In the case of the Taxable Funds (except for Government and Treasury Obliga-
tions Funds)
By:3:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------------
After:3:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------------
(2) In the case of the Government and Treasury Obligations
Funds
By:5:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------------
After:5:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------------
(3) In the case of Tax-Free Fund
By:1:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------------
After:1:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------------
(4) In the case of the Municipal Fund
By:12:00 noon--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------------
After:12:00 noon--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired as Federal Funds to the Service Organization's bank account desig-
nated in the Account Information Form. Redemption proceeds will normally be
wired as set forth above, but may be paid up to three Business Days after re-
ceipt of the Service Organization's properly executed redemption request. For
example, payment may be delayed if the Federal Reserve Bank is closed on the
day redemption proceeds would ordinarily be wired. After a wire has been ini-
tiated by Goldman Sachs, neither Goldman Sachs nor the Trust assumes any fur-
ther responsibility for the performance of intermediaries or the FST Service
Shareholder's Service Organization in the transfer process. If a problem with
such performance arises, the FST Service Shareholder should deal directly with
such intermediaries or Service Organization.
OTHER REDEMPTION INFORMATION
A minimum account balance of $50 million in a Fund ($10 million if an in-
vestor satisfies the minimum initial investment in any other Fund) is required
to remain a FST Service Shareholder. A Fund may redeem all of the FST Service
Shares of any FST Service Shareholder whose account in that Fund has a net as-
set value which is less than the minimum described above. The Trust will give
sixty (60) days' prior written notice to such Shareholders whose FST Service
Shares are being redeemed to allow them to purchase sufficient additional
FST Service Shares of the Fund to avoid such redemption.
----------------
30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FST SERVICE SHARES
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder and Fund Expenses..............................................
Financial Highlights.......................................................
An Introduction to the Funds...............................................
Investment Policies........................................................
Description of Securities and Investment
Techniques................................................................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Shares of the Trust.......................................
Additional Services........................................................
Purchase of Shares.........................................................
Reports to Shareholders....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Shares.......................................................
</TABLE>
FST-ISS-MMT15K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST SERVICE SHARES
-----------
PROSPECTUS
-----------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST PREFERRED SHARES
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management invest-
ment company (a "mutual fund") which includes the Financial Square Funds (the
"Funds"). This Prospectus relates only to the offering of FST Preferred shares
of beneficial interest ("FST Preferred Shares") of the Funds. Goldman Sachs
Asset Management, a separate operating division of Goldman, Sachs & Co.,
serves as each Fund's investment adviser. Goldman, Sachs & Co. serves as each
Fund's distributor and transfer agent.
The following Funds seek 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 Funds may invest in
diversified portfolios of the following types of instruments:
Financial Square Prime Obligations Fund. 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.
Financial Square Money Market Fund. Securities of the U.S. Government, its
agencies, authorities and instrumentalities, U.S. dollar denominated obliga-
tions of U.S. and foreign banks, U.S. dollar denominated commercial paper and
other short-term obligations of U.S. and foreign companies, foreign govern-
ments, states, municipalities and other entities, and repurchase agreements.
Financial Square Money Market Plus Fund. Securities of the U.S. Government,
its agencies, authorities and instrumentalities, U.S. dollar denominated obli-
gations of U.S. and foreign banks, U.S. dollar denominated commercial paper
and other short-term obligations of U.S. and foreign companies, foreign gov-
ernments, states, municipalities and other entities, and repurchase agree-
ments. In order to obtain a rating from a rating organization, the Fund will
observe special investment restrictions.
Financial Square Treasury Obligations Fund. Securities issued or guaranteed
by the U.S. Treasury and repurchase agreements relating to such securities.
Financial Square Treasury Instruments Fund. Securities issued or guaranteed
by the U.S. Treasury.
Financial Square Government Fund. Securities of the U.S. Government, its
agencies, authorities, and instrumentalities, and repurchase agreements relat-
ing to such securities.
Financial Square Federal Fund. Securities of the U.S. Government and certain
of its agencies, authorities and instrumentalities, the interest income from
which is generally exempt from state income taxation.
Financial Square Tax-Free Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes and
not an item of tax preference under the federal alternative minimum tax.
Financial Square Municipal Money Market Fund. Securities issued by or on be-
half of states, territories and possessions of the United States and their po-
litical subdivisions, agencies, authorities and instrumentalities, and the
District of Columbia, the interest from which is, in the opinion of bond coun-
sel, if any, excluded from gross income for federal income tax purposes (but
not necessarily exempt from federal alternative minimum tax or state and local
taxes).
AN INVESTMENT IN A FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOV-
ERNMENT AND THERE CAN BE NO ASSURANCE THAT A FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
- -------------------------------------------------------------------------------
ADDITIONAL INFORMATION................
Goldman Sachs Mutual Funds-Toll Free: 800-621-2550
This Prospectus provides you with information about the Funds that you should
know before investing in FST Preferred Shares. It should be read and retained
for future reference. If you would like more detailed information, the State-
ment of Additional Information dated May 1, 1997, as amended or supplemented
from time to time, is available upon request without charge from Service Orga-
nizations, as defined herein, or by calling the telephone number listed above
or by writing Goldman, Sachs & Co., 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 Commis-
sion. Not all Funds are available in certain states. Please call the phone
number listed above to determine availability in your state.
- -------------------------------------------------------------------------------
FST PREFERRED SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUAR-
ANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RE-
SERVE 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 AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 1, 1997.
<PAGE>
SHAREHOLDER AND FUND EXPENSES (NOTE 1)
FST PREFERRED SHARES (NOTE 2)
<TABLE>
<CAPTION>
FINANCIAL FINANCIAL
FINANCIAL FINANCIAL FINANCIAL FINANCIAL FINANCIAL SQUARE SQUARE
SQUARE SQUARE SQUARE SQUARE SQUARE FINANCIAL FINANCIAL TAX-FREE MUNICIPAL
PRIME MONEY MONEY TREASURY TREASURY SQUARE SQUARE MONEY MONEY
OBLIGATIONS MARKET MARKET OBLIGATIONS INSTRUMENTS GOVERNMENT FEDERAL MARKET MARKET
FUND FUND PLUS FUND FUND FUND FUND FUND FUND FUND
----------- --------- --------- ----------- ----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSAC-
TION EXPENSES
Maximum Sales Charge
Imposed on
Purchases........... None None None None None None None None None
Sales Charge Imposed
on Reinvested
Distributions....... None None None None None None None None None
Deferred Sales Load
Imposed on
Redemptions......... None None None None None None None None None
Exchange Fee......... None None None None None None None None None
ANNUAL OPERATING
EXPENSES
(as a percentage of
average daily net
assets)
Management Fees
(Note 3) (after
adjustments)........ 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17% 0.17%
Other Expenses
Administration Fees
(Note 4)........... 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
Other Expenses (af-
ter expense limita-
tion) (Note 3)..... 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
---- ---- ---- ---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES (Note 3).... 0.28% 0.28% 0.28% 0.28% 0.28% 0.28% 0.28% 0.28% 0.28%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Financial Square Prime Obligations Fund... $ $ $ $
Financial Square Money Market Fund........ $ $ $ $
Financial Square Money Market Plus Fund... $ $ N/A N/A
Financial Square Treasury Obligations
Fund..................................... $ $ $ $
Financial Square Treasury Instruments
Fund..................................... $ $ N/A N/A
Financial Square Government Fund.......... $ $ $ $
Financial Square Federal Fund............. $ $ N/A N/A
Financial Square Tax-Free Money Market
Fund..................................... $ $ $ $
Financial Square Municipal Money Market
Fund..................................... $ $ N/A N/A
</TABLE>
2
<PAGE>
- --------
Notes:
(1) The purpose of this table is to assist investors in understanding the var-
ious costs and expenses that an investment in the Funds will bear directly
or indirectly. Operating expenses for Financial Square Money Market Plus
Fund, Financial Square Municipal Money Market Fund, Financial Square Fed-
eral Fund and Financial Square Treasury Instruments Fund are based on es-
timates of expenses expected to be incurred during the fiscal year ending
December 31, 1997. Operating expenses for the other Funds are based on ac-
tual amounts incurred during the fiscal year ended December 31, 1996.
These expenses are expected to be incurred on an ongoing basis. The table
and hypothetical example should not be considered a representation of past
or future expenses; actual expenses may vary depending upon a variety of
factors including the actual performance of each Fund, which may be
greater or less than 5%.
(2) The information set forth in the foregoing table and example relates only
to FST Preferred Shares of the Funds. The Funds also offer FST Shares, FST
Service Shares and FST Administration Shares which are subject to differ-
ent fees and expenses (which affect performance), have different minimum
investment requirements and are entitled to different services. Informa-
tion regarding any other class of the Funds may be obtained from your
sales representative or from Goldman Sachs by calling the number on the
cover page of this Prospectus. See "Organization and Shares of the Trust".
(3) Goldman Sachs Asset Management (the "Adviser" or "GSAM") has agreed that a
portion of its fee will not be imposed. In addition, the Adviser has
agreed to reduce or otherwise limit certain expenses of each Fund (exclud-
ing fees payable to Service Organizations, as defined herein, taxes, in-
terest and brokerage and litigation, indemnification and other extraordi-
nary expenses), on an annualized basis, to .18% of such Fund's average
daily net assets. The following table sets forth the expenses payable by
each Fund not reflecting the reduction of fees otherwise payable and any
expense limitations:
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT ADMINISTRATION OTHER OPERATING
FEES FEES EXPENSES EXPENSES
---------- -------------- -------- ---------
<S> <C> <C> <C> <C>
Financial Square Prime Obliga-
tions Fund.................... 0.205% 0.10% % %
Financial Square Money Market
Fund.......................... 0.205% 0.10% % %
Financial Square Money Market
Plus Fund..................... 0.205% 0.10% % %
Financial Square Treasury Obli-
gations Fund.................. 0.205% 0.10% % %
Financial Square Treasury In-
struments Fund................ 0.205% 0.10% % %
Financial Square Government
Fund.......................... 0.205% 0.10% % %
Financial Square Federal Fund.. 0.205% 0.10% % %
Financial Square Tax-Free Money
Market Fund................... 0.205% 0.10% % %
Financial Square Municipal
Money Market Fund............. 0.205% 0.10% % %
</TABLE>
(4) Service Organizations (other than broker-dealers) may charge other fees to
their customers who are the beneficial owners of FST Preferred Shares in
connection with their customers' accounts. See "Administration." Such
fees, if any, may affect the return such customers realize with respect to
their investments.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following data with respect to a share (of the class specified) of the
Financial Square Prime Obligations, Financial Square Money Market, Financial
Square Treasury Obligations, Financial Square Government and Financial Square
Tax-Free Money Market Funds outstanding during the periods indicated have been
audited by independent auditors, as indicated in their report incorpo-
rated by reference and attached to the Statement of Additional Information
from the annual report to shareholders for the fiscal year ended December 31,
1996 (the "Annual Report"), and should be read in conjunction with the finan-
cial statements and related notes incorporated by reference and attached to
the Statement of Additional Information.
Financial Square Municipal Money Market, Financial Square Money Market Plus,
Financial Square Federal and Financial Square Treasury Instruments Funds had
no operations during the fiscal year ended December 31, 1996. Accordingly,
there are no selected per share data and ratios presented for these Funds.
4
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- -------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- -------------------------------------------------------------------------------
6
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- -------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- -------------------------------------------------------------------------------
8
<PAGE>
Goldman Sachs Trust--Financial Square Funds
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
9
<PAGE>
AN INTRODUCTION TO THE FUNDS
THE TRUST: The Trust is a no-load, open-end, management investment company
registered under the Investment Company Act of 1940, as amended (the "Invest-
ment Company Act"). Each Fund 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 Funds' investment ad-
viser (the "Adviser" or "GSAM").
THE DISTRIBUTOR: Goldman Sachs, which serves as the Funds' distributor and
transfer agent, is one of the largest international investment banking and
brokerage firms in the United States.
THE INVESTORS: The Funds are designed for institutional investors seeking a
high rate of return, a stable net asset value and convenient liquidation priv-
ileges. The Funds are particularly suitable for banks, corporations and other
financial institutions that seek investment of short-term funds for their own
accounts or for the accounts of their customers. Shares of the Government Fund
are intended to qualify as eligible investments for Federally chartered credit
unions pursuant to Sections 107(7), 107(8) and 107(15) of the Federal Credit
Union Act, Part 703 of the National Credit Union Administration ("NCUA") Rules
and Regulations and NCUA Letter Number 155. The Fund intends to review changes
in the applicable laws, rules and regulations governing eligible investments
for federally chartered credit unions, and to take such action as may be nec-
essary so that the investments of the Fund qualify as eligible investments un-
der the Federal Credit Union Act and the regulations thereunder. Shares of the
Government Fund, however, may or may not qualify as eligible investments for
particular state chartered credit unions. State chartered credit unions should
consult qualified legal counsel to determine whether the Government Fund is a
permissible investment under the law applicable to it.
THE FUNDS: Each Fund'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 Fund may invest only in securities that are de-
termined to present minimal credit risk and meet certain other criteria.
TAXABLE FUNDS: Prime Obligations, Money Market, Money Market Plus, Trea-
sury Obligations, Government, Treasury Instruments and Federal Funds.
TAX-EXEMPT FUNDS: Tax-Free Money Market and Municipal Money Market Funds.
INVESTMENT OBJECTIVES AND POLICIES FOR TAXABLE FUNDS AND TAX-EXEMPT
FUNDS: To maximize current income to the extent consistent with the preser-
vation of capital and the maintenance of liquidity by investing exclusively
in high quality money market instruments. In order to obtain a rating from
a rating organization, the Money Market Plus Fund will observe special in-
vestment restrictions. The Treasury Instruments and Federal Funds pursue
their objectives by limiting their investments to certain U.S. Treasury Ob-
ligations and U.S. Government Securities (each as defined herein), respec-
tively, the interest from which is generally exempt from state income taxa-
tion. Each investor should consult his or her tax adviser to determine
whether distributions from the Treasury Instruments and Federal Funds (and
any other Fund that may hold such obligations) derived from interest on
such obligations are exempt from state income taxation in the investor's
own state.
NET ASSET VALUE: Each Fund seeks to maintain a stable net asset value of
$1.00 per share.
MAXIMUM REMAINING MATURITY OF PORTFOLIO INVESTMENTS: Thirteen months at the
time of purchase.
10
<PAGE>
DOLLAR-WEIGHTED AVERAGE PORTFOLIO MATURITY: Not more than ninety days.
FIRST TIER SECURITIES: Each Fund 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, comparable 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 defined herein
are considered First Tier Securities.
SECOND TIER SECURITIES: The Tax-Exempt Funds 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 Taxable Funds 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 Fund may purchase Second Tier Securities,
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.
11
<PAGE>
INVESTMENT POLICIES
<TABLE>
<CAPTION>
SHORT-TERM
BANK OBLIGATIONS OF ASSET-BACKED & FOREIGN
US US OBLIGATIONS CORPORATIONS RECEIVABLES- GOVERNMENT
TREASURY GOVERNMENT (EXCLUDING BANK COMMERCIAL AND OTHER REPURCHASE BACKED OBLIGATIONS
OBLIGATIONS SECURITIES COMMERCIAL PAPER) PAPER ENTITIES AGREEMENTS SECURITIES (US$)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prime [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Obligations US Banks US Rated
Fund Only Entities Only
Only
- -----------------------------------------------------------------------------------------------------------------------------
Money Market [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Fund Over 25% of US and US and Rated
total assets Foreign Foreign Only
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Money Market
Plus Fund [ ] [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Over 25% of US and US and
total assets Foreign Foreign
must be (US$) (US$)
invested in Commercial Entities
US and Paper
Foreign (US$)
Banks
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Obligations [ ] [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Government Fund [ ] [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Municipal Money
Market Fund [ ]
Tax-
Exempt
Only
- -----------------------------------------------------------------------------------------------------------------------------
Treasury
Instruments [ ]
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Federal Fund [ ] [ ] [ ]
(Does
not
intend
to
invest)
</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.
12
<PAGE>
<TABLE>
<CAPTION>
TAXABLE TAX-EXEMPT CREDIT INVESTMENT UNRATED SUMMARY OF
MUNICIPALS MUNICIPAL QUALITY**** COMPANIES SECURITIES TAXATION* MISCELLANEOUS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] First [ ] [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
[ ] First [ ] [ ] Taxable May invest in
Tier Up to 10% of Federal and obligations of
total assets State** the
in other International
investment Bank for
companies Reconstruction
and Development
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets State**
in other
investment
companies
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May (but does
At least 80% of Second Up to 10% of Federal and not currently
net assets in Tier total assets Taxable intend to)
Municipal in other State*** invest up to 20%
Instruments investment in AMT
(except in companies securities and
extraordinary may temporarily
circumstances) invest in the
taxable money
market
instruments
described herein
- ---------------------------------------------------------------------------------------------------
[ ] First or [ ] [ ] Tax-Exempt May invest up to
At least 80% of Second Up to 10% of Federal and 100% in AMT
net assets in Tier total assets Taxable securities and
Municipal in other State*** may temporarily
Instruments investment invest in the
(except in companies taxable money
extraordinary market
circumstances) instruments
described herein
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable Under
Tier Up to 10% of Federal and extraordinary
total assets generally circumstances,
in other exempt from may hold cash,
investment state taxation U.S. Government
companies Securities
subject to state
taxation or cash
equivalents
- ---------------------------------------------------------------------------------------------------
First [ ] Taxable
Tier Up to 10% of Federal and
total assets generally
in other exempt from
investment state taxation
companies
</TABLE>
* See "Taxes" below for an explanation of the tax consequences summarized
in the table above.
** Taxable except for distributions from U.S. Treasury Obligation interest
and certain U.S. Government Securities interest in many states.
*** Taxable except for distributions from interest on obligations of an in-
vestor's state of residence in certain states.
**** A Fund holding a security fully supported by a guarantee may substitute
the credit quality of the guarantee in determining the credit quality of
the security.
13
<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, obligations issued or guaranteed by U.S. Government
agencies, authorities or instrumentalities are supported either by (a) the
full faith and credit of the U.S. Government (such as securities of the Gov-
ernment National Mortgage Association), (b) the right of the issuer to borrow
from the Treasury (such as securities of the Student Loan Marketing Associa-
tion), (c) the discretionary authority of the U.S. Government to purchase the
agency's obligations (such as securities of the Federal National Mortgage As-
sociation 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 financial support to U.S. Government agencies, authorities or instru-
mentalities 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 Fund may also invest in separately traded principal and interest compo-
nents of securities guaranteed or issued by the U.S. Treasury if such compo-
nents are traded independently under the Separate Trading of Registered Inter-
est and Principal of Securities program ("STRIPS").
The Treasury Instruments and Federal Funds invest in U.S. Treasury Obliga-
tions and certain U.S. Government Securities (including U.S. Treasury Obliga-
tions), respectively, the interest from which is generally exempt from state
income taxation. Securities generally eligible for this exemption include
those issued by the U.S. Treasury and those issued by certain agencies, au-
thorities or instrumentalities of the U.S. Government, including the Federal
Home Loan Banks, Federal Farm Credit Banks, Tennessee Valley Authority and the
Student Loan Marketing Association.
CUSTODIAL RECEIPTS
Each Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may also acquire securities issued or guaranteed as
to principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities 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. AND FOREIGN BANK OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "U.S. Bank Obligations" limited to securities issued or guaranteed by U.S.
banks (including certificates of deposit, commercial
14
<PAGE>
paper, unsecured bank promissory notes and bankers' acceptances) which have
more than $1 billion in total assets at the time of purchase. Such obligations
may also include debt obligations issued by U.S. subsidiaries of such banks.
The Money Market and Money Market Plus Funds may also invest in "Foreign
Bank Obligations" limited to U.S. dollar denominated obligations issued or
guaranteed (including fixed time deposits) by foreign banks which have more
than $1 billion in total assets at the time of purchase, U.S. branches of such
foreign banks (Yankee obligations), foreign branches of such foreign banks and
foreign branches of U.S. banks having more than $1 billion in total assets at
the time of purchase. Such bank obligations may be general obligations of the
parent bank or may be limited to the issuing branch by the terms of the spe-
cific obligations or by government regulation.
The Money Market and Money Market Plus Funds will invest more than 25% of
their total assets in bank obligations (whether foreign or domestic). However,
if adverse economic conditions prevail in the banking industry (such as sub-
stantial losses on loans, increases in non-performing assets and charge-offs
and declines in total deposits) the Funds may, for defensive purposes, tempo-
rarily invest less than 25% of their total assets in bank obligations. As a
result, the Funds may be especially affected by favorable and adverse develop-
ments in or related to the banking industry. The activities of U.S. banks and
most foreign banks are subject to comprehensive regulations which, in the case
of U.S. regulations, have undergone substantial changes in the past decade.
The enactment of new legislation or regulations, as well as changes in inter-
pretation and enforcement of current laws, may affect the manner of operations
and profitability of domestic and foreign banks. Significant developments in
the U.S. banking industry have included deregulation of interest rates, in-
creased competition from other types of financial institutions, increased ac-
quisition activity, geographic expansion and, during the late 1980's, an in-
creased number of bank failures. Banks may be particularly susceptible to cer-
tain economic factors, such as interest rate changes and adverse developments
in the market for real estate. Fiscal and monetary policy and general economic
cycles can affect the availability and cost of funds, loan demand and asset
quality and thereby impact the earnings and financial conditions of banks. See
"Foreign Government Obligations--Foreign Risks" below.
COMMERCIAL PAPER AND OTHER SHORT-TERM CORPORATE OBLIGATIONS
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Commercial Paper" (including variable amount master demand notes and as-
set-backed commercial paper) which is payable in U.S. dollars and is issued or
guaranteed by U.S. corporations, U.S. commercial banks, foreign corporations
(Money Market and Money Market Plus Funds only), foreign commercial banks
(Money Market and Money Market Plus Funds only) or other entities. In addi-
tion, the Funds 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, foreign corporations (Money Market and Money Market Plus
Funds only) or other entities.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations, Money Market and Money Market Plus Funds may invest
in "Asset-Backed and Receivables-Backed Securities" which represent participa-
tions in, or are secured by and payable from, pools of assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of var-
ious types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables provided that
such securities have been rated by at least one NRSRO. Such asset pools are
securitized through the use of privately-formed trusts or special purpose cor-
porations. Payments or distributions of principal
15
<PAGE>
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. To the extent con-
sistent with its investment objectives and policies, each of the Prime Obliga-
tions, Money Market and Money Market Plus Funds may invest in new types of
mortgage-related securities and in other asset-backed securities that may be
developed in the future.
FOREIGN GOVERNMENT OBLIGATIONS
The Money Market and Money Market Plus Funds may invest in U.S. dollar de-
nominated obligations (limited to commercial paper and other notes) issued or
guaranteed by a foreign government or any entity located or organized coun-
tries that maintain a short-term foreign currency rating in the highest short-
term rating categories by at least 2 NRSROs, or if unrated, deemed to be
equivalent by the Trustees. The Money Market and Money Market Plus Funds may
not invest more than 25% of their total assets in the securities of any one
foreign government.
FOREIGN RISKS. Investments in foreign securities and bank obligations may
present a greater degree of risk than investments in securities of domestic
issuers because of less publicly-available financial and other information,
less securities regulation, potential imposition of foreign withholding and
other taxes, war, expropriation or other adverse governmental actions. Foreign
banks and their foreign branches are not regulated by U.S. banking authori-
ties, and generally are not bound by the accounting, auditing and financial
reporting standards applicable to U.S. banks.
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.
TYPES OF MUNICIPAL INSTRUMENTS:
<TABLE>
<CAPTION>
TAX-FREE MONEY MARKET AND
MUNICIPAL MONEY MARKET FUNDS
-------------------------------------------------------------------------
<S> <C>
FIXED RATE NOTES AND SIMILAR In highest short-term or one of the
DEBT INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
VARIABLE AND FLOATING RATE In highest short-term or one of the
DEMAND INSTRUMENTS two highest long-term rating
categories
-------------------------------------------------------------------------
TAX-EXEMPT COMMERCIAL PAPER In highest rating category
-------------------------------------------------------------------------
MUNICIPAL BONDS In one of the two highest rating
categories
-------------------------------------------------------------------------
UNRATED NOTES, PAPER, BONDS AND Determined to be of comparable quality
OTHER INSTRUMENTS by Adviser pursuant to criteria
approved by the Trustees
</TABLE>
16
<PAGE>
As a matter of fundamental policy, at least 80% of each of the Tax-Free
Money Market and Municipal Money Market Fund's net assets will ordinarily be
invested in Municipal Instruments. Each Tax-Exempt Fund 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 each
Tax-Exempt Fund. The Prime Obligations, Money Market and Money Market Plus
Funds may invest in short-term obligations issued or guaranteed by state and
municipal governments when yields on such securities are attractive compared
to other taxable investments.
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 Fund's average portfolio maturity. There is a risk
that a Fund will not be considered the owner of a tender option bond for fed-
eral 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 Funds to sell them at
par value plus accrued interest
17
<PAGE>
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 consider-
ing whether an obligation meets a Fund's quality standards, the Fund will look
to the creditworthiness of the party providing unconditional demand features
or other unconditional obligations to support the credit of the issuer of the
security. A Fund may consider the maturity of a variable or floating rate Mu-
nicipal Instrument to be shorter than its ultimate stated maturity if the Fund
has the right to demand prepayment of its principal at specified intervals
prior to the security's ultimate stated maturity, subject to the conditions
for using amortized cost valuation under the Investment Company Act. A Fund
may purchase such variable or floating rate obligations 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 Funds (other than the Treasury Obliga-
tions, Treasury Instruments, Government and Federal Funds) may invest in in-
dustrial development bonds (generally referred to under current tax law as
"private activity bonds"), the interest from which would be an item of tax
preference when distributed as "exempt-interest dividends" to shareholders un-
der the federal alternative minimum tax. See "Taxes" and "Distributions." Mu-
nicipal Fund may invest up to 100% of its assets in private activity bonds.
Tax-Free Fund does not currently intend to invest in such bonds. If Tax-Free
Fund's policy not to invest in private activity bonds should change in the fu-
ture, shareholders would be notified and such investments would not exceed 20%
of Tax-Free Fund's net assets.
OTHER POLICIES. Ordinarily the Tax-Exempt Funds expect that 100% of their
portfolio securities will be Municipal Instruments. However, the Funds may
hold cash or invest in short-term taxable securities as set forth above. Such
Funds may invest 25% or more of the value of their respective total assets in
Municipal Instruments which are related in such a way that an economic, busi-
ness or political development or change affecting one Municipal Instrument
would also affect the other Municipal Instruments. For example, the Tax Exempt
Funds may invest all of their respective assets in (a) Municipal Instruments
the interest on which is paid solely from revenues from similar projects such
as hospitals, electric utility systems, multi-family housing, nursing homes,
commercial facilities (including hotels), steel companies or life care facili-
ties, (b) Municipal Instruments whose issuers are in the same state or (c) in-
dustrial development obligations. Concentration of a Fund's investments in
these Municipal Instruments will subject the Fund, 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 Fund (other than the Treasury Obligations, Treasury Instruments, Gov-
ernment and Federal Funds) may purchase Municipal Instruments which are backed
by letters of credit, which will ordinarily be irrevocable, issued by domestic
banks or foreign banks (excluding Prime Obligations Fund) which have a branch,
agency or subsidiary in the United States. In addition, these Funds may ac-
quire securities in the form of custodial receipts which evidence ownership 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 Fund (other than the Treasury Obligations, Treasury Instru-
ments, Government and Federal Funds) may acquire the right to sell the secu-
rity to another party at a guaranteed price and date.
18
<PAGE>
REPURCHASE AGREEMENTS
Each Fund (other than the Treasury Instruments Fund) may only enter into re-
purchase agreements with primary dealers. A repurchase agreement is an agree-
ment under which a Fund purchases securities and the seller agrees to repur-
chase the securities within a particular time at a specified price. Such price
will exceed the original purchase price, the difference being income to the
Fund, and will be unrelated to the interest rate on the purchased security. A
Fund's custodian or sub-custodian will maintain custody of the purchased secu-
rities for the duration of the agreement. The value of the purchased securi-
ties, 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 fail-
ure 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. In evaluat-
ing 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 repurchase
agreements entered into by a Fund will be taxable to its shareholders. In ad-
dition, each Fund, 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 bal-
ance of which will be invested in one or more repurchase agreements.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase when-issued securities and make contracts to purchase
or sell securities for a fixed price at a future date beyond customary settle-
ment time. A Fund is required to hold and maintain in a segregated account
with the Fund's custodian or sub-custodian until three days prior to settle-
ment date, cash or liquid assets, as permitted by applicable law 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 in-
volve 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 in-
creases 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, the Fund may dispose of a when-issued
security or forward commitment prior to settlement if the Adviser deems it ap-
propriate 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 each Fund'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 Fund acquiring more than 3% of the voting shares of any other
investment company and a prohibition on investing more than 5% of a Fund's as-
sets in securities of any one investment company or more than 10% of its as-
sets in securities of all investment companies. Each Fund will indirectly bear
its proportionate share of any management fees and other expenses paid by such
other investment companies. Goldman Sachs will not impose a portion of the
management fees payable by a Fund (the "Acquiring Fund") with respect to as-
sets invested in another money market investment company (the "Acquired Fund")
as follows. The amount of the management fees otherwise payable by the Acquir-
ing Fund and not imposed by Goldman Sachs will be equal to the amount of man-
agement fees indirectly paid by the Acquiring Fund as a shareholder of the Ac-
quired Fund. Such other investment companies will have investment objectives,
policies and restrictions substantially similar to those of the Acquiring Fund
and will be subject to substantially the same risks.
19
<PAGE>
INVESTMENT LIMITATIONS
TAXABLE AND TAX-EXEMPT FUNDS. Pursuant to Rule 2a-7 under the Investment
Company Act, each Taxable Fund and Tax-Exempt Fund may not invest more than 5%
of its total assets (taken at amortized cost) in the securities of any one is-
suer (except U.S. Government Securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee). Each of
such Funds 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. With respect to 75% of each Fund's assets, not
more than 10% of such Fund's total assets may be invested in securities issued
by or subject to demand features or guarantees from the same issuer. A
Tax-Exempt Funds investment in conduit securities (Municipal Securities pro-
viding for repayment by a person other than the municipal issuer) which are
Second Tier securities are limited to 5% of the Fund's total assets (1% per
issuer). The foregoing operating policies are more restrictive than the funda-
mental policy set forth in the Statement of Additional Information.
INVESTMENT RESTRICTIONS. Each Fund is subject to certain investment restric-
tions that are described in detail under "Investment Restrictions" in the
Statement of Additional Information. Fundamental investment restrictions of a
Fund cannot be changed without approval of a majority of the outstanding
shares of that Fund. Treasury Obligations Fund's policy of limiting its in-
vestments to U.S. Treasury Obligations and related repurchase agreements is
also fundamental. All investment objectives and policies not specifically des-
ignated as fundamental are non-fundamental and may be changed without share-
holder approval.
RESTRICTED AND OTHER ILLIQUID SECURITIES. Each Fund may purchase securities
that are not registered ("restricted securities") under the Securities Act of
1933 ("1933 Act"), but can be offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of its net assets in illiquid investments, which include fixed
time deposits maturing in more than seven days and restricted securities.
Restricted securities (including commercial paper issued pursuant to Section
4(2) of the 1933 Act) which the Board of Trustees has determined are liquid,
based upon a continuing review of the trading markets for the specific re-
stricted security, will not be deemed to be illiquid investments for purposes
of this restriction. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring the liquidity
of restricted securities. The Board, however, will retain sufficient oversight
and be ultimately responsible for the determinations. Since it is not possible
to predict with assurance that the market for restricted securities eligible
for resale under Rule 144A will continue to be liquid, the Adviser will care-
fully monitor each Fund's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and availability of
information. This investment practice could have the effect of increasing the
level of illiquidity in a Fund to the extent that qualified institutional buy-
ers become for a time uninterested in purchasing these restricted securities.
In addition, each Fund 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 Fund (taken at market
value) would be invested in such investments. 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.
20
<PAGE>
MANAGEMENT
THE ADVISER
GSAM, One New York Plaza, New York, New York, a separate operating division
of Goldman Sachs, acts as investment adviser to the Funds. Goldman Sachs reg-
istered as an investment adviser in 1981. As of March , 1997, Goldman Sachs,
together with its affiliates, acted as investment adviser, administrator or
distributor for approximately $ billion in assets.
As of November , 1996, 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 invest-
ment banking and brokerage firm providing a broad range of financing and in-
vestment services both in the United States and abroad.
Pursuant to an SEC order, each Taxable Fund may enter into principal trans-
actions in certain taxable money market instruments, including repurchase
agreements, with Goldman Sachs.
Under the Management Agreements, GSAM continually manages each Fund, includ-
ing the purchase, retention and disposition of its securities and other as-
sets. In addition GSAM administers each Fund's business affairs and performs
various shareholder servicing functions to the extent not provided by other
organizations. The management of each Fund is subject to the supervision of
the Trustees and each Fund's investment policies. For these services, the
Trust, on behalf of each Fund, pays GSAM a monthly fee at an annual rate of
each Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
COMBINED ADVISORY AND
ADMINISTRATIVE
RATE PAID FOR
FISCAL YEAR
ANNUAL RATE ENDED 12/31/96
----------- ---------------------
<S> <C> <C>
Financial Square Prime
Obligations Fund....... .205% .17%
Financial Square Money
Market Fund............ .205% .17%
Financial Square Trea-
sury Obligations Fund.. .205% .17%
Financial Square Trea-
sury Instruments Fund.. .205% .17%
Financial Square Tax
Free Money Market Fund. .205% .17%
Financial Square Govern-
ment Fund.............. .205% N/A%
Financial Square Federal
Fund................... .205% N/A%
Financial Square Munici-
pal Money Market Fund.. .205% N/A%
Financial Square Money
Market Plus Fund....... .205% N/A%
</TABLE>
The difference, if any, between the stated advisory fee and the actual fees
paid by the Funds reflects the fact that GSAM did not charge the full amount
of advisory fees to which it would have been entitled. The combined rate paid
for the fiscal year ended December 31, 1996 includes .04% and .13% paid pursu-
ant to separate advisory and administration agreements.
GSAM has agreed not to impose all or a portion of its advisory fee and/or to
reduce or otherwise limit the total operating expenses of each Fund (excluding
fees payable to Service Organizations, as defined herein, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) on
an annualized basis to 0.18% of the Fund's average daily net assets. Such re-
ductions or limits are calculated monthly on a cumulative basis. GSAM has no
current intention to but may discontinue or modify any of such reductions or
limitations at its discretion.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606, serves as the Dis-
tributor of shares of each Fund pursuant to a Distribution Agreement with the
Trust. The Distributor will assist in the sale of shares of each Fund upon the
terms described herein. Goldman Sachs also serves as the Transfer Agent of
each Fund.
21
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may purchase and
hold shares of the Funds in order to increase the assets of the Funds. In-
creasing the Fund's assets may enhance investment flexibility and diversifica-
tion. Goldman Sachs reserves the right to redeem at any time some or all of
the Fund shares acquired for its own account. Goldman Sachs will consider the
effect of redemptions on the Funds and other shareholders in deciding whether
to redeem its shares.
TAXES
Each Fund is treated as a separate entity for federal income tax purposes.
The Treasury Instruments and Federal Funds intend to elect and each other Fund
has elected to be treated as a regulated investment company and each Fund in-
tends to continue to qualify for such treatment under Subchapter M of the In-
ternal Revenue Code of 1986 (the "Code") for each taxable year. To qualify as
such, each 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, each 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 cer-
tain timing requirements of the Code.
Dividends paid by a Fund 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 shareholders as ordinary
income, except for any "exempt-interest dividends" paid by Tax-Free Fund and
Municipal Fund, as described below. 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 gain regardless of how long the shareholders have held
their shares. These tax consequences will apply to distributions of any Fund
regardless of whether distributions are received in cash or reinvested in
shares. Certain distributions paid by the Funds in January of a given year
will be taxable to shareholders as if received on December 31 of the year in
which they are declared. Shareholders will be informed annually about the
amount and character of distributions received from the Funds for federal
income tax purposes, including any distributions that may constitute a return
of capital or any distributions of Municipal Fund that may constitute a tax
preference item under the federal alternative minimum tax.
The Tax-Exempt Funds intend to satisfy certain requirements of the Code for
the payment of "exempt-interest dividends" not included in shareholders' fed-
eral gross income. Dividends paid by these Funds from interest on tax-exempt
obligations and properly designated by the Funds as exempt-interest dividends,
including dividends attributable to exempt-interest dividends received by a
Fund from other regulated 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 social security or railroad retirement benefits are taxable.
Persons who are "substantial users" of facilities financed by certain indus-
trial development or private activity bonds should consult their own tax ad-
visers before purchasing shares of these Funds. Interest incurred to purchase
or carry shares of these Funds will not be deductible for federal income tax
purposes to the extent related to exempt-interest dividends paid by the Funds.
Individuals and certain other classes of shareholders 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 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 ordi-
nary dividends from the Funds.
22
<PAGE>
If a Fund invests in foreign securities, it may be subject to foreign with-
holding or other foreign taxes on income earned on such securities and is ex-
pected to be unable to pass such taxes through to shareholders, who therefore
are not expected to include such taxes in income or be entitled to claim for-
eign tax credits or deductions with respect to such taxes.
In addition to federal taxes, a shareholder may be subject to state, local
or foreign taxes on payments received from a Fund. A state income (and possi-
bly local income and/or intangible property) tax exemption is generally avail-
able to the extent 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 obliga-
tions issued by or on behalf of the particular state or a political subdivi-
sion thereof, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their own tax advisers concerning these matters.
NET ASSET VALUE
The net asset value of each Fund (other than the Government and Treasury Ob-
ligations Funds) 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.
The net asset value of Government and Treasury Obligations Funds is determined
as of 5:00 p.m. New York time on each Business Day. Net asset value per share
for each class of shares of each Fund is calculated by determining the amount
of net assets attributable to each class of shares and dividing by the number
of shares for such class.
On any Business Day, as defined herein, when the Public Securities Associa-
tion ("PSA") recommends that the securities market close early, each Fund re-
serves the right to cease accepting purchase and redemption orders for same
Business Day credit at the time PSA recommends that the securities market
close. On days any Fund closes early, purchases and redemption orders received
after the PSA recommended closing time will be credited to the next Business
Day. In addition, each Fund reserves the right to advance the time by which
purchase and redemption orders must be received for same Business Day credit
as permitted by the SEC.
Each Fund seeks to maintain a net asset value of $1.00 per share. In this
connection, each Fund values its portfolio securities on the basis of amor-
tized cost. The amortized cost method values a security at its cost on the
date of purchase and thereafter assumes a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. For a more complete description
of the amortized cost valuation method and its effect on existing and prospec-
tive shareholders, see the Statement of Additional Information. There can be
no assurance that a Fund will be able at all times to maintain a net asset
value per share of $1.00.
YIELD INFORMATION
From time to time, each Fund may advertise its yield, effective yield and
average annual total return. Average annual total return is determined by com-
puting the average annual percentage change in value of $1,000 invested at the
maximum public offering price for 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 relevant period. Each Fund may furnish total return calcula-
tions based on a cumulative, average, year-by-year or other basis for various
specified periods by means of quotations, charts, graphs or schedules. In ad-
dition to the above, each Fund may from time to time advertise its performance
relative to certain rankings or indices. The yield of a Fund refers to the in-
come generated by an investment in that Fund over a seven-day period (which
period will be stated in the advertisement). This income is then annualized;
that is, the amount of income generated by the investment during that week is
assumed to be generated each week
23
<PAGE>
over a 52-week period and is shown as a percentage of the investment. The ef-
fective yield is calculated similarly but, when annualized, the income earned
by an investment in the Fund is assumed 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 Funds and the Federal and Treasury Instruments Funds may each
also quote tax-equivalent yield. Each Fund's tax-equivalent yield is calcu-
lated 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 Fund's
yield, assuming certain tax brackets for a shareholder.
Investors should note that the investment results of a Fund are based on
historical performance and will fluctuate over time. Any presentation of a
Fund's yield, effective yield or tax-equivalent yield for any prior period
should not be considered a representation of what an investment may earn or
what a Fund's yield, effective yield or tax-equivalent yield may be in any fu-
ture period.
Yield, effective yield and tax-equivalent yield will be calculated sepa-
rately for each class of shares in existence. Because each such class of
shares is subject to different expenses, the net yield of such classes of a
Fund for the same period may differ. See "Organization and Shares of the
Trust" below.
ORGANIZATION AND 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 se-
ries of Goldman Sachs Money Market Trust, a Massachusetts business trust and
were reorganized into the Trust as of May 1, 1997. The Trustees of the Trust
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 of
the Trust have authority 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 have authorization to classify or re-
classify any series or portfolio of shares into one or more classes. The
Trustees have authorized the issuance of four classes of shares of each of the
Funds, which are: FST Shares, FST Preferred Shares, FST Administration Shares
and FST Service Shares. (Institutions that provide services to holders of FST
Preferred Shares, FST Administration Shares or FST Service Shares are referred
to in this Prospectus as "Service Organizations").
When issued, shares are fully paid and nonassessable. In the event of liqui-
dation, shareholders are entitled to share pro rata in the net assets of the
applicable Fund available for distribution to such shareholders. All shares
entitle their holders to one vote per share (but may, at the discretion of the
Trustees, be voted on a net asset value basis), have noncumulative voting
rights, are freely transferable and have no preemptive, subscription or con-
version rights.
Shares of a Fund will be voted separately by Fund with respect to matters
pertaining to that Fund except for the election of Trustees and ratification
of independent accountants. For example, shareholders of each Fund are re-
quired to approve the adoption of any investment advisory agreement relating
to that Fund and any changes in fundamental investment restrictions or poli-
cies of such Fund. Approval by the shareholders of one Fund is effective only
as to that Fund.
24
<PAGE>
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, com-
municate with other shareholders in connection with requiring a special meet-
ing of shareholders. The Trustees, however, 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.
25
<PAGE>
ADMINISTRATION
Each Fund has adopted a Preferred Administration Plan with respect to the
FST Preferred Shares which authorizes it to compensate certain institutions
for providing account administration services to their customers who are bene-
ficial owners of such Shares ("Service Organizations"). Each Fund will enter
into agreements with Service Organizations which purchase FST Preferred Shares
on behalf of their customers ("Service Agreements"). The Service Agreements
will provide for compensation to the Service Organization in an amount up to
.10% (on an annualized basis) of the average daily net asset value of the FST
Preferred Shares of that Fund attributable to or held in the name of the Serv-
ice Organization for its customers. The services provided by a Service Organi-
zation may include acting, directly or through an agent, as the sole share-
holder of record, maintaining account records for its customers, and process-
ing orders to purchase and redeem FST Preferred Shares for its customers.
For the fiscal year ended December 31, 1996, the Trust, on behalf of Prime
Obligations Fund, Money Market Fund, Treasury Obligations Fund, Government
Fund and Tax Free Fund, paid Service Organizations fees at the annual rate of
.10% of each Fund's average daily net assets attributable to FST Preferred Ad-
ministration Shares.
Holders of FST Preferred Shares of a Fund will bear all expenses and fees
paid to Service Organizations with respect to such Shares as well as any other
expenses which are directly attributable to such Shares.
Service Organizations (other than broker dealers) may charge other fees to
their customers who are the beneficial owners of FST Preferred Shares in con-
nection 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 an investor's return with respect to an investment in a Fund.
All inquiries of beneficial owners of FST Preferred Shares of the Funds
should be directed to such owners' Service Organization.
PURCHASE OF SHARES
It is expected that all direct purchasers of FST Preferred Shares will be
Service Organizations or their nominees, which may purchase FST Preferred
Shares of the Funds through Goldman Sachs. Customers of Service Organizations
may invest in such shares only through their Service Organizations.
As set forth below, FST Preferred Shares of the Funds may be purchased on
any Business Day at the net asset value next determined after receipt from the
Service Organization of both the purchase order and the purchase price in Fed-
eral Funds. Purchase orders may be made by telephoning Goldman Sachs at 800-
621-2550 or by a written request addressed to Goldman Sachs, Attention: Share-
holder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606. It is strongly recommended that payment be effected by wiring Federal
Funds to The Northern Trust Company ("Northern"), Chicago, Illinois, as the
sub-custodian for State Street Bank and Trust Company ("State Street").
Purchases of FST Preferred Shares may also be made by a Service Organization
by delivering a Federal Reserve draft or check payable to the appropriate Fund
and drawn on a U.S. bank to Goldman Sachs, Attention: Shareholder Services,
Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois 60606. It is expected
that
25
<PAGE>
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. FST Preferred Shares purchased by check may not
be redeemed until the check has cleared, as described under "Redemption of
Shares."
Purchases of shares of any Fund may also be made through an Automated Clear-
ing House ("ACH") transfer to Goldman Sachs Trust c/o Northern, as
subcustodian for State Street. Purchase orders are effected at the net asset
value next determined after receipt of both the purchase order and the pur-
chase price in Federal Funds. It is expected that ACH transfers will ordinar-
ily be converted to Federal Funds on the Business Day following receipt of the
ACH transfer.
FST Preferred Shares of each Fund are deemed to have been purchased when an
order becomes effective and are entitled to dividends on FST Preferred Shares
purchased as follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
IF ORDER IS RECEIVED FROM A SERVICE
ORGANIZATION BY GOLDMAN SACHS DIVIDENDS BEGIN
----------------------------------- ---------------
(1) In the case of Taxable Funds (except for Government
and Treasury Obligations Funds)
<C> <S> <C>
By: 3:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------------------------
After: 3:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------------------------
(2) In the case of Government and Treasury Obligations
Funds
By: 5:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------------------------
After: 5:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------------------------
(3) In the case of Municipal Fund
By: 1:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------------------------
After: 1:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------------------------
(4) In the case of Tax-Free Fund
By: 2:00 p.m.--N.Y. time Same Business Day
- ---------------------------------------------------------------------
After: 2:00 p.m.--N.Y. time Next Business Day
- ---------------------------------------------------------------------
</TABLE>
The Service Organizations are responsible for timely transmittal of purchase
orders to Goldman Sachs and Federal Funds to Northern. In order to facilitate
timely transmittal, the Service Organizations have established times by which
purchase orders and Federal Funds must be received by them.
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.
26
<PAGE>
FST Preferred Shares of a Fund are purchased at the net asset value per
share without the imposition of a sales charge. Goldman Sachs, as each Fund's
transfer agent, will maintain a complete record of transactions and FST Pre-
ferred Shares held in each record holder's account. The Trust and Goldman
Sachs each reserves the right to reject any purchase order for any reason.
MINIMUM INVESTMENT AND OTHER INFORMATION
The minimum requirement for investing in a Fund is $50 million ($10 million
if an investor satisfies the minimum initial investment in any other Fund).
The Trust and Goldman Sachs each reserves the right to waive the minimum in-
vestment requirement. A Service Organization may impose a minimum amount for
initial and subsequent investments in FST Preferred Shares of the Funds, 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 Organizations for further information concerning such
requirements and charges. A Service Organization may purchase FST Preferred
Shares in connection with sweep account programs.
SUBSEQUENT INVESTMENTS
There is no minimum amount required for subsequent investments. Orders for
the purchase of additional FST Preferred Shares should be accompanied by in-
formation identifying the account in which FST Preferred Shares are to be pur-
chased.
REPORTS TO SHAREHOLDERS
The Trust will issue an annual report containing audited financial state-
ments and a semi-annual report to record holders of FST Preferred Shares of
each Fund, including Service Organizations who hold such Shares for the bene-
fit of their customers. Upon request, a printed confirmation for each transac-
tion will be provided by Goldman Sachs. Any dividends and distributions paid
by the Funds are also reflected in regular statements issued by Goldman Sachs
to shareholders of record. Service Organizations will be responsible for pro-
viding similar services to their own customers who are the beneficial owners
of such Shares.
DISTRIBUTIONS
All or substantially all of each Fund's net investment income will be de-
clared daily (as of 4:00 p.m. New York time for each Fund other than Govern-
ment and Treasury Obligations Funds and as of 5:00 p.m. New York time for Gov-
ernment and Treasury Obligations Funds) as a dividend and distributed to Serv-
ice Organizations monthly. Distributions will be made in additional FST Pre-
ferred Shares of the same Fund or, at the election of a Service Organization,
in cash. The election to reinvest dividends and distributions or receive them
in cash may be changed by a Service Organization at any time upon written no-
tice to Goldman Sachs. If no election is made, all dividends 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 capital gains, if any, will
be distributed in accordance with the requirements of the Code and may be re-
flected in the Fund's daily distributions. Each Fund may distribute at least
annually its long-term capital gains, if any, after reduction by available
capital losses. In order to avoid excessive fluctuations in the amount of
monthly capital gains distributions, a portion of any net capital gains real-
ized on the disposition of securities
27
<PAGE>
during the months of November and December may be distributed during the sub-
sequent calendar year. Although realized gains and losses on the assets of a
Fund are reflected in the net asset value of the Fund, they are not expected
to be of an amount which would affect the Fund's net asset value of $1.00 per
share.
The income declared as a dividend for the Treasury Obligations Fund is based
on estimates of net investment income for the Fund. Actual income may differ
from estimates, and differences, if any, will be included in the calculation
of subsequent dividends.
A Fund's net investment income consists of the excess of (i) accrued inter-
est or discount (including both original issue and market discount on taxable
securities) on portfolio securities, and (ii) any income of the Fund from
sources other than capital gains over (iii) the amortization of market premium
on all portfolio securities and (iv) the estimated expenses of the Fund, in-
cluding a proportionate share of the general expenses of the Trust.
EXCHANGES
FST Preferred Shares of each Fund may be exchanged by Service Organizations
for FST Preferred Shares of any other Financial Square Fund at the net asset
value next determined either by writing to Goldman Sachs, Attention: Share-
holder Services, Goldman Sachs Trust, 4900 Sears Tower, Chicago, Illinois
60606 or by calling Goldman Sachs at 800-621-2550. All telephone exchanges
must be registered in the same name(s) and with the same address as are regis-
tered in the Fund from which the exchange is being made. 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 Shares" to confirm that such instructions are genu-
ine. Exchanges are available only in states where the exchange may legally be
made. The exchange privilege may be modified or withdrawn at any time on 60
days' written notice.
REDEMPTION OF SHARES
HOW TO REDEEM
Customers of Service Organizations may redeem FST Preferred Shares of a Fund
through their respective Service Organizations. The Service Organizations are
responsible for the transmittal of redemption requests by their customers to
Goldman Sachs. In order to facilitate timely transmittal of redemption re-
quests, Service Organizations have established procedures by which redemption
requests must be made and times by which redemption requests must be received
by them. Additional documentation may be required when deemed appropriate by a
Service Organization.
A Service Organization may redeem such Shares without charge upon request on
any Business Day at the net asset value next determined after receipt by
Goldman Sachs of the redemption request. Redemption requests may be made by
telephoning Goldman Sachs at 800-621-2550 or by a written request addressed to
Goldman Sachs, Attention: Shareholder Services, Goldman Sachs Trust, 4900
Sears Tower, Chicago, Illinois 60606. It may be difficult to implement redemp-
tions by telephone in times of drastic economic or market changes.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Goldman Sachs employs reasonable procedures specified by the Trust
to confirm that such instructions are genuine. Among other things, any redemp-
tion 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
28
<PAGE>
the designated bank account to verify instructions. 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 trans-
actions. In all other cases, neither the Trust nor Goldman Sachs will be re-
sponsible for the authenticity of redemption instructions received by tele-
phone. A redemption may also be made with respect to certain Funds by means of
the check redemption privilege described in the Statement of Additional Infor-
mation. Goldman Sachs reserves the right to redeem accounts with balances be-
low $500.
Additional documentation may be required by Goldman Sachs in order to estab-
lish that a redemption request has been properly authorized. A redemption re-
quest will not be considered to have been received in proper form until such
additional documentation has been submitted to Goldman Sachs by the Service
Organization. The payment of redemption proceeds for FST Preferred Shares re-
cently purchased by check will be delayed for up to 15 days until the check
has cleared.
PAYMENT OF REDEMPTION PROCEEDS AND DIVIDENDS
In accordance with the following, redemption proceeds will be wired to the
record holder of FST Preferred Shares.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REDEMPTION REQUEST
RECEIVED FROM REDEMPTION
SERVICE ORGANIZATION PROCEEDS
BY GOLDMAN SACHS ORDINARILY DIVIDENDS
-------------------- ---------- ---------
<C> <S> <C> <C>
(1) In the case of the Taxable Funds (except for Government and
Treasury Obligations Funds)
By: 3:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------
After: 3:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------
(2) In the case of the Government and Treasury Obligations Funds
By: 5:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------
After: 5:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------
(3) In the case of the Tax-Free Fund
By: 1:00 p.m.--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------
After: 1:00 p.m.--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------
(4) In the case of the Municipal Fund
By: 12:00 noon--N.Y. time Wired Same Business Day Not earned on Day
request is received
- ---------------------------------------------------------------------------
After: 12:00 noon--N.Y. time Wired Next Business Day Earned on Day
request is received
- ---------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The Funds will arrange for the proceeds of redemptions effected by any means
to be wired as Federal Funds to the Service Organization's bank account desig-
nated in the Account Information Form. Redemption proceeds will normally be
wired as set forth above, but may be paid up to three Business Days after re-
ceipt of the Service Organization's properly executed redemption request. For
example, payment may be delayed if the Federal Reserve Bank is closed on the
day redemption proceeds would ordinarily be wired. After a wire has been ini-
tiated by Goldman Sachs, neither Goldman Sachs nor the Trust assumes any fur-
ther responsibility for the performance of intermediaries or the FST Preferred
Shareholder's Service Organization in the transfer process. If a problem with
such performance arises, the FST Preferred Shareholder should deal directly
with such intermediaries or Service Organization.
OTHER REDEMPTION INFORMATION
A minimum account balance of $50 million in a Fund ($10 million if an in-
vestor satisfies the minimum initial investment in any other Fund) is required
to remain a FST Preferred Shareholder. A Fund may redeem all of the FST Pre-
ferred Shares of any FST Preferred Shareholder whose account in that Fund has
a net asset value which is less than the minimum described above. The Trust
will give sixty (60) days' prior written notice to such Shareholders whose FST
Preferred Shares are being redeemed to allow them to purchase sufficient addi-
tional FST Preferred Shares of the Fund to avoid such redemption.
----------------
30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FST PREFERRED SHARES
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE: 800-621-2550
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shareholder and Fund Expenses..............................................
Financial Highlights.......................................................
An Introduction to the Funds...............................................
Investment Policies........................................................
Description of Securities and Investment Techniques........................
Investment Limitations.....................................................
Management.................................................................
Taxes......................................................................
Net Asset Value............................................................
Yield Information..........................................................
Organization and Shares of the Trust.......................................
Administration.............................................................
Purchase of Shares.........................................................
Reports to Shareholders....................................................
Distributions..............................................................
Exchanges..................................................................
Redemption of Shares.......................................................
</TABLE>
FST-1PRE-MMT6K/596
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
FST PREFERRED SHARES
-----------
PROSPECTUS
-----------
MANAGED BY
GOLDMAN SACHS ASSET MANAGEMENT
A SEPARATE OPERATING DIVISION OF
GOLDMAN, SACHS & CO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
INSTITUTIONAL SHARES
(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 Service Shares of Goldman Sachs Large Cap Growth Fund,
Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs Growth and Income Fund,
Goldman Sachs Growth Fund, Goldman Sachs Mid-Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs
Emerging Markets Equity Fund, dated May 1, 1997, as amended and/or supplemented
from time to time (the "Prospectus"), which may be obtained without charge from
institutions ("Service Organizations") that hold Service Shares for the benefit
of their customers, 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..........................
Investment Policies...................
Investment Restrictions...............
Management............................
Portfolio Transactions and Brokerage..
Net Asset Value.......................
Taxation..............................
Performance Information...............
Financial Statements..................
Shares of the Trust...................
Other Information.....................
Service Plan..........................
Appendix A:...........................
Appendix B:...........................
Appendix C:...........................
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
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
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 CORE Large Cap Growth Fund,
Goldman Sachs Growth and Income Fund,
GOLDMAN SACHS ASSET Goldman Sachs Growth Fund, and
MANAGEMENT INTERNATIONAL Goldman Sachs Mid Cap Equity Fund,
Investment Adviser to: One New York Plaza
Goldman Sachs International Equity Fund New York, New York 10004
Goldman Sachs Asia Growth Fund,
Goldman Sachs Emerging Markets Equity Fund
140 Fleet Street
London, England EC4A 2BJ
TOLL FREE (IN U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Trust, Inc. (the "Trust") is an open-end, management investment
company currently offering, through this Additional Statement, including Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
CORE U.S. Equity Fund ("CORE U.S. Equity Fund"), Goldman Sachs Growth and Income
Fund ("Growth and Income Fund"), Goldman Sachs Growth Fund ("Growth Fund"),
Goldman Sachs Mid Cap Fund ("Mid Cap Equity Fund"), Goldman Sachs International
Equity Fund ("International Fund"), Goldman Sachs Asia Growth Fund ("Asia Growth
Fund") and Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Fund")(individually, a "Fund," or collectively, the "Funds").
The Trust was organized under the laws of the State of Maryland on
September 27, 1989 and was reorganized as part of a Delaware business trust on
May 1, 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 three
additional series, and additional series may be added in the future from time to
time. CORE Large Cap Growth Fund, CORE U.S. Equity Fund, Growth and Income
Fund, Growth Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund currently offer four classes of shares: Institutional Shares, Service
Shares, Class A Shares and Class B Shares. Mid Cap 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 CORE
Large Cap Growth Fund, Growth and Income Fund, Growth Fund and Mid Cap Fund.
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
serves as investment adviser the CORE U.S. Equity Fund. Goldman Sachs Asset
Management International ("GSAMI"), an affiliate of Goldman Sachs, serves as
investment adviser to the International Fund, Asia Growth Fund and Emerging
Markets Fund. GSAM, GSFM and GSAMI are each sometimes referred to individually
as an "Investment Adviser" and collectively, as the "Investment Advisers."
Goldman Sachs serves as each Fund's distributor and transfer agent. Each Fund's
custodian is State Street Bank and Trust Trust ("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.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. MFG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority
that Goldman Sachs places on serving client interests. As MFG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of return, portfolio composition and
holdings and guide shareholders through operational details. An MFG client can
B-3
<PAGE>
also utilize SMART/SM/ personal computer software system which allows holders to
purchase and redeem shares and also obtain portfolio and account information
directly.
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.
INVESTING IN EMERGING MARKETS, INCLUDING ASIA
=============================================
Asia Growth Fund and Emerging Markets Fund are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of Emerging Countries issuers (in the case of
Emerging Markets Fund) 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. In addition, certain of Asia
Growth Fund's and Emerging Markets Fund's potential investment and management
techniques entail special risks. There can be no assurance that either Fund
will achieve its investment objective. GSAMI believes that Asia offers an
attractive investment environment and that new opportunities will continue to
emerge in the years ahead. Asia Growth Fund concentrates on companies that
GSAMI believes are taking full advantage of the region's growth and that have
the potential for long-term capital appreciation. See "Investment Objectives and
Policies" and "Risk Factors" in the Prospectus and "Emerging Country Securities"
in this Additional Statement.
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 Asian 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 Asian
markets may also affect a Fund's ability to accurately value their portfolio
securities or to acquire or dispose of securities at the price and time they
wish to do so or in order to meet redemption requests.
B-4
<PAGE>
Transaction costs, including brokerage commission 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 Asia Growth Fund and Emerging Markets Fund. A
Fund may be required to establish special custodial or other arrangemetns 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 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 Fund's assets.
Asia Growth 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."
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.
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 Asia Growth Fund is uninvested and no
return is earned on such assets. The inability of Asia Growth Fund to make
intended security purchases or sales due to
B-5
<PAGE>
settlement problems could result either in losses to Asia Growth Fund due to
subsequent declines in value of the portfolio securities or, if Asia Growth Fund
has entered into a contract to sell the securities, could result in possible
liability to the purchaser.
CORE LARGE CAP GROWTH FUND AND CORE U.S. EQUITY FUND
- ----------------------------------------------------
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of CORE Large Cap Growth Fund and CORE U.S. Equity
Fund 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 annual gross
income be derived from the sale or other disposition of stocks or securities
(including options and futures contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of the Fund's
net assets. The Funds may purchase futures contracts on the S&P BARRA Growth
Index (in the case of CORE Large Cap Growth Fund) or the S&P 500 Index (in the
case of CORE U.S. Equity Fund) in order to keep a Fund's effective equity
exposure close to 100%. For example, 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 sophisticated
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 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,
such securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Investment 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 Investment 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 nature of 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 Funds
use 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 FUND
- ------------------
B-6
<PAGE>
International 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.
GSAM and GSAMI believes that the high historical returns and less efficient
pricing of foreign markets create favorable conditions for International Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in 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 Fund's portfolio through a three-stage
investment process. Because International Fund is a long-term holder of stocks,
the portfolio managers adjust International 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 Investment Advisers
seek 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.
Within these industries the Investment Advisers seek 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 always act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAM'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. See "Investment Policies" and "Advisory and Administrative
Services."
The members of GSAM and 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 Fund may only invest in debt
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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 bonds 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 the Growth and Income Fund, Growth Fund, Growth Fund, Mid Cap Fund
and Emerging Markets Fund to dispose of a particular security when necessary to
meet its 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 Investment Advisers could find it more 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 these 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 the Growth and
Income Fund, Growth Fund, Mid Cap Funds and Emerging Markets Fund may invest,
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 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 Investment 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 in 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.
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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 tax and accounting purposes which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
a Fund's distribution obligations. See "Taxation."
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 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-BACKED AND ASSET-BACKED SECURITIES
- -------------------------------------------
Mortgage-backed securities represent direct or indirect participation in,
or are collateralized by and payable from, mortgage loans secured by real
property. 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.
Mortgage-backed and 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 which may
increase the volatility of such investments relative to similarly rated debt
securities. 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 mortgage-backed and 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
U.S. Government securities and other mortgage-backed and 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 owned 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
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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. Each Fund, other than
CORE Large Cap Growth Fund and CORE U.S. Equity Fund, may also purchase and
write options on futures contracts. CORE Large Cap Growth Fund and CORE U.S.
Equity Fund may only purchase and sell futures contracts on the S&P/BARRA Growth
Index or S&P 500 Index, respectively. The other Funds may purchase and sell
futures contracts based upon 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, except for CORE
Large Cap Growth Fund and CORE U.S. Equity Fund, 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 certain 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 interest 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 Large Cap
Growth Fund and CORE U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) 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 the Fund has
acquired or expects to acquire.
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 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 and
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts in
order to hedge against an anticipated rise in interest rates or a decline in
market prices or (with the exception of CORE Large Cap Growth Fund and CORE U.S.
Equity Fund) foreign currency rates that would adversely affect the dollar value
of such Fund's portfolio securities. Such futures contracts may (except in the
case of CORE Large Cap
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Growth Fund and CORE U.S. Equity Fund) include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities. Similarly, each Fund (other than CORE
Large Cap Growth Fund and CORE U.S. Equity Fund) may sell futures contracts on a
particular currency in which its portfolio securities are quoted or denominated
or in one currency 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 Investment 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 Investment 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 such Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities will be
substantially offset by appreciation in the value of the futures position. On
the other hand, any unanticipated appreciation in the value of a Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when the 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 (upon exercise of the option)
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
(except for CORE Large Cap Growth Fund and CORE U.S. Equity Fund) 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
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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 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
denominated or quoted 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 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
futures contracts and (except for CORE Large Cap Growth Fund and CORE U.S.
Equity Fund) will engage in 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, 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,
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 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 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 may 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
- --------------------------------------------
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WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest, although CORE Large Cap Growth
Fund and CORE U.S. Equity Fund have no present intention of doing so. 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 the Fund would have deposited with its
custodian cash or liquid, high grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income for a 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.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets, as permitted by applicable law, (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 or any other 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, as permitted by
applicable law, 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 counter party to such option. Such purchases
are referred to as "closing purchase transactions."
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PURCHASING OPTIONS. Each Fund may purchase put and call options on any
securities in which it may invest or options on any securities index based on
securities in which it may invest, although Select Equity Fund has no present
intention of doing so. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it has
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.
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, if any, 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.
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
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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 (the "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 Investment Advisers. An exchange, board of trade or
other trading facility may order the liquidations 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 an Investment Adviser's ability to
predict future price fluctuations and the degree of correlation between the
options and securities markets.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
- ---------------------------------------
Each Fund may invest in shares of 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 the 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 Trust Act of 1940, as amended (the "Act"). REITs
(especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
- ----------------------------------
B-15
<PAGE>
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 an Investment
Adviser for investment by the Fund. CORE U.S. Equity Fund has 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.
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
Investment 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. International Fund, Asia Growth Fund and Emerging Markets
Fund 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 are generally 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
B-16
<PAGE>
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 the 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 U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) may
also 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.
A Fund (other than CORE Large Cap Growth Fund and CORE U.S. Equity Fund)
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".
EMERGING COUNTRY SECURITIES
- ---------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Growth and Income Fund,
Growth Fund and Mid Cap Fund may enter into forward foreign currency exchange
contracts for hedging purposes.
B-17
<PAGE>
International Fund, Asia Growth Fund and Emerging Markets Fund may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
increase total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract, 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 purchase 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 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 Investment 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.
International Fund, Asia Growth Fund and Emerging Markets Fund 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. International Fund, Asia Growth Fund and Emerging
Markets Fund 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, as permitted by
applicable law 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 International Fund, Asia Growth Fund and Emerging
Markets Fund forward contracts entered into to increase total return. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis
B-18
<PAGE>
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 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.
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.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
than CORE Large Cap Growth Fund and CORE U.S. Equity Fund) may write (sell)
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.
International Fund, Asia Growth Fund and Emerging Markets Fund may use
options on currency to cross-hedge, which involves writing or purchasing options
on one currency to hedge against changes in exchange rates for a different
currency with a pattern of correlation. In addition, International Fund, Asia
Growth Fund and Emerging Markets Fund may purchase call options on currency to
seek to increase total return when the Adviser anticipates that the currency
will appreciate in value, but the securities 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 such 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 such 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 upt and call options, see
"Written Covered Options" above.
B-19
<PAGE>
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. 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 such 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 and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.
In addition to using options for the hedging purposes described above,
International Fund, Asia Growth Fund and Emerging Markets Fund may use options
on currency to seek to increase total return. International Fund, Asia Growth
Fund and Emerging Markets Fund 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, International Fund, Asia Growth Fund and Emerging
Markets Fund may forego the opportunity to profit from an increase in the market
value of the underlying currency. Also, when writing put options,
International Fund, Asia Growth Fund and Emerging Markets Fund 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.
International Fund, Asia Growth Fund and Emerging Markets Fund would
normally purchase call options to seek to increase total return in anticipation
of an increase in the market value of a currency. International Fund, Asia
Growth Fund and Emerging Markets 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 International Fund,
Asia Growth Fund and Emerging Markets Fund would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by either
Fund for the purpose of benefiting from a decline in the value of currencies
which it does not own. International Fund, Asia Growth Fund and Emerging
Markets 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 Funds 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
B-20
<PAGE>
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.
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
- --------------
The International Fund, Asia Growth Fund and Emerging Markets Fund may,
with respect to 5% of their net assets, enter into currency swaps for hedging
purposes and to seek to increase total return. Inasmuch as swaps are entered
into for good faith hedging purposes or are offset by a segregated account as
described below, the Investment Advisers believe that swaps do not constitute
senior securities as defined in the Act, and, accordingly, will not treat them
as being subject to a Fund's borrowing restrictions. An amount of cash or
liquid assets, as permitted by applicable law having an aggregate net asset
value at least equal to the entire amount of the payment stream payable by the
Fund will be maintained in a segregated account by the Fund's custodian.
A Fund will not enter into any currency swap unless the credit quality of
the unsecured senior debt or the claims-paying ability of the other party
thereto is considered to be investment grade by the Investment Adviser. If
there is a default by the other party to such a transaction, the 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. However, the staff of the SEC takes
the position that currency swaps are illiquid investments that are subject to
each Fund's 15% limitation on such investments.
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
B-21
<PAGE>
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 an Investment Adviser to be of good
standing, and when, in the judgment of the Investment Adviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If an Investment Adviser determines 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 average 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, as permitted by applicable law 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.
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 Investment 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
B-22
<PAGE>
extent that the Fund invests in a money market fund for which an Investment
Adviser or any of its affiliates acts as adviser, the advisory and
administration fees payable by the Fund to an Investment 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 Investment 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 the Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally, for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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 Investment
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), 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 Investment 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 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 Funds. The investment objective of each Fund and all
other
B-23
<PAGE>
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. 1, asset coverage of at least 300% (as defined in the
Act), inclusive of any amounts borrowed, must be maintained at all times.
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 Funds. The investment objective of each other 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 each Fund's 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. 1, asset coverage of at
least 300% (as defined in the Act), inclusive of any amounts borrowed, must be
maintained at all times.
The Company may not on behalf of any Fund:
==========================================
(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 (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
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,
B-24
<PAGE>
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.
(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) Invest in companies for the purpose of excercising 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 borrowing exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
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.
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
B-25
<PAGE>
<TABLE>
<CAPTION>
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 (since June 1994)
Retired. 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 General Partner, Goldman Sachs, (since 1986);
One New York Plaza Chairman and Chief Executive Officer, Goldman
New York, NY 10004 Sachs Asset Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996);
One New York Plaza & President formerly, President, MFS Retirement Services Inc.,
New York, NY 10004 of Massachusetts Financial Services (prior thereto).
John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since
One New York Plaza General Partner of Goldman Sachs (1990-1994 1966);
New York, NY 10004 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 (since 1978);
Taylor Hall Director of Bryn Mawr College Josiah Macy,
Bryn Mawr, PA 19010 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, 47 Trustee Director and Vice President of Goldman
One New York Plaza Funds Management Inc. (from April 1990 to
New York, NY 10004 Sachs November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994); Limited Partner,
Goldman Sachs (since December 1994).
</TABLE>
B-26
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman and Chief Executive Officer, MS
One Northfield Plaza #218 Communications Inc.(a company engaged in radio
Northfiled, IL 60093 broadcasting) (since November 1988),
Director, Federal Express Corporation 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; February 1987 to
retirement in August 1992) and Vice Chairman, Chief Financial and
Administrative Officer, prior thereto; Director American Information
Technologies Corporation; Director, Walgreen Co. (a retail drug store busi
ness); 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. (since
70 West Madison St. 1990); Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors)(January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration, Goldman
One New York Plaza 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
</TABLE>
B-27
<PAGE>
<TABLE>
<S> <C> <C>
4900 Sears Tower President 1992); Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
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 1985);
4900 Sears Tower President Manager of Shareholder Servicing of GSAM
Chicago, IL 60606 (since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs
85 Broad Street Asset Management (since February 1994); Vice
New York, NY 10004 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 Assistant Secretary Goldman Sachs (since Novem
New York, NY 10004 ber 1993 and May 1994, respectively ); Counsel
to the Funds Group, Goldman Sachs Asset
Management (since November 1993); Associate of Shereff Friedman, Hoffman & Goodman
(prior thereto).
*Steven E. Hartstein, 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 Robinson, 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
*Elizabeth D. Anderson, 27 Assistant Portfolio Manager, GSAM (since April 1996);
Junior One New York Plaza Secretary Portfolio Manager, Goldman Sachs Asset
</TABLE>
B-28
<PAGE>
<TABLE>
<S> <C> <C>
New York, NY 10004 Management (since 1993). Funds Trading
Assistant, GSAM (1993-1995). Compliance Analyst,Prudential Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor. As of April ___, 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.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
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
Fund. GSAM, One New York Plaza, New York, New York, a separate operating
division of Goldman Sachs, serves as investment adviser to CORE Large Cap Growth
Fund, Growth and Income Fund, Growth Fund and Mid Cap Fund. GSAMI, 140 Fleet
Street, London, England, EC4A 2BJ acts as the investment adviser to
International Fund, Asia Growth Fund and Emerging Markets Fund. See "Management"
in the Funds' Prospectus for a description of the applicable Investment
Adviser's duties as investment adviser or subadviser and GSAM's duties as
administrator 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 among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, 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 Investment 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' 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 Investment 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 Investment 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
B-29
<PAGE>
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 in International Fund's portfolio among various
currencies, GSAM and GSAMI 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, GSAM and
GSAMI 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 the International Fund's
investment objective and criteria.
Each Fund's management agreement provides that the Investment
Advisers may render similar services to others so long as the services provided
by the Investment Advisers thereunder are not impaired thereby.
The CORE Large Cap Growth Fund and Growth Fund management agreement was
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
January 28, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth Fund, Growth Fund
and Emerging Markets Fund). Each Fund's agreement will remain in effect until
June 30, 1998 and from year to year thereafter provided such continuance is
specifically approved at least annually by (a) the vote of a majority of the
outstanding voting securities of such Fund or a majority of the Trustees of the
Trust, and (b) the vote of a majority of the non-interested Trustees of the
Trust, cast in person at a meeting called for the purpose of voting on such
approval. Each advisory agreement will terminate automatically if assigned (as
defined in the Act) and is terminable at any time without penalty by the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the affected Fund on 60 days' written notice to the Investment
Adviser and by the Investment Adviser on 60 days' written notice to the
Trust.
Pursuant to the management agreements the Investment Advisers are entitled
to receive the fees listed below, payable monthly of such Funds average daily
net assets. In addition, the Investment Adviser voluntarily agreed to limit its
management fee to an annual rate also listed below:
Management with Management without
Fund Fee Limitations Fee Limitations
- ---- --------------- ---------------
GSAM
CORE Large Cap Growth Fund 1.00%
Growth and Income Fund 0.70%
Growth Fund
Mid Cap Fund 1.00%
GSFM
CORE U.S. Equity Fund 0.75%
B-30
<PAGE>
GSAMI
International Fund 1.00%
Asia Growth Fund 1.00%
Emerging Markets Fund
The Investment Advisers may discontinue or modify the above limitations in
the future at their discretion, although they have no current intention to do
so.
For the last three fiscal years the amounts of the advisory fees incurred
by each Fund then in existence were as follows:
1997 1996 1995
---- ---- ----
CORE Lareg Cap Growth Fund/1/ N/A N/A N/A
CORE U.S. Equity Fund/5/ $ 578,721 $462,255/2/
Growth and Income Fund 1,748,649 621,416
Growth Fund
Mid Cap Fund/4/ 391,234 N/A
International Fund/2,6/ 698,718 796,627
Asia Growth Fund/2,3/ 1,172,731 414,813
Emerging Markets Fund/1/
- ---------------------------
1 Not operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by the Investment Advisers to limit management fees to 0.44%,
0.23% and 0.71% of CORE U.S. Equity Fund's, International Fund's and Asia
Growth Fund's average daily net assets.
3 Commenced operations on July 8, 1994.
4 Commenced operations on August 1, 1995.
5 Gives effect to the agreement (which was in effect as of June 15,1995) by
GSFM to limit management fees to 0.44% of the CORE U.S. Equity Fund's
average daily net assets. For the fiscal year ended January 31, 1996 and
1997, had limitations not been in effect, CORE U.S. Equity Fund would have
paid $679,759 and $____________, respectively, in investment management
fees.
6 For the fiscal years ended January 31, 1995, 1996 and 1997, International
Fund paid GSAMI subadvisory fees of $1,593,255, $1,397,436 and
$____________ (which does not include the effect of the waiver to 0.48 of
1%, which is currently in effect), respectively.
Pursuant to the management agreements, in addition to managing the
portfolio investments, the Investment Advisers responsibilities include, subject
to the general supervision of the Trustees, (a) providing supervision of all
aspects of the Trust's non-investment operations (the parties giving due
recognition to the fact that certain of such operations are performed by others
pursuant to agreements with each Fund), (b) providing the Trust, to the extent
not provided pursuant to its custodian and transfer agency agreements 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 Trust, (c) arranging, to the extent not provided
pursuant to such agreements, for the preparation, at the Trust's expense, of its
tax returns, reports to shareholders, periodic updating of the prospectuses and
reports filed with the SEC and other regulatory authorities, (d) providing the
Trust, 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 Trust's 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 Investment Advisers and Goldman Sachs
and their affiliates in the management of, or their interests in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede the Funds' investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment 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
B-31
<PAGE>
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 the Funds'
performance. Such transactions, particularly in respect to proprietary accounts
or customer accounts other than those included in the Investment 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 Investment 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 the good faith discretion of such
entities 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 Investment Advisers and/or the
affiliates will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Advisers
and/or their affiliates are performing services or when position limits have
been reached.
In connection with their management of the Funds, the Investment Advisers
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs, J. Aron and other affiliates. An Investment Adviser
will not be under any obligation, however, to effect transactions on behalf of a
Fund 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
Investment 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 Investment Advisers in managing the
Funds.
The results of a Fund's investment activities may differ significantly from
the results achieved by an Investment Adviser and its 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 a
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 a Fund invests.
B-32
<PAGE>
In addition, certain principals and certain of the employees of the
Investment 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 Investment Adviser may enter into transactions and invest in
currencies or other 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 not have an incentive to assure that a Fund obtains 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 a Fund invests or which
may be based on the performance of the 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 their clients to take actions adverse to the interests of the client. To
the extent that affiliate 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 such 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 Fund shares acquired for its own account. A large redemption
of Fund shares by Goldman Sachs could significantly reduce the asset size of a
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 Investment 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 CORE U.S.Equity Fund, Growth and Income Fund, Mid
Cap Fund, International Fund and Asia Growth Fund; CORE Large Cap Growth Fund
and Growth Fund; and Emerging Markets Fund, dated February 1, 1993, as amended
as of January 30, 1996, January 28, 1997 and April 23, 1997, respectively.
Pursuant to the
B-33
<PAGE>
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 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. Goldman Sachs is not entitled to receive a fee
from the CORE U.S., International and Asia Growth and Emerging Markets Funds
with respect to the Institutional and Service Shares of such Funds. 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,
Goldman Sachs is entitled to receive a fee with respect to the Institutional and
Service Shares of the CORE Large Cap Growth Fund, Growth and Income Fund, Growth
Fund and Mid Cap Fund equal to 0.04% of the net assets of each Fund attributable
to such classes of shares. Transfer agency fees paid by a Fund with respect to
a particular class are allocated to the shares of such class.
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund's Institutional Class then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CORE Large Cap Growth Fund/4/ N/A N/A
CORE U.S. Equity Fund/1/ $11,571
Growth and Income Fund/3/ N/A
Growth Fund/4/
Mid Cap Fund/2/ 26,082
International Fund/3/ N/A
Asia Growth Fund/3/ N/A
Emerging Markets Fund/4/ N/A N/a
- ---------------------------
</TABLE>
1 The Institutional Class commenced operations on June 15, 1995.
2 Commenced operations on August 1, 1995.
3 Institutional classes were not in existence for the fiscal year ended
January 31, 1996.
4 Not operational.
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 borne by a Fund
include, without limitation, the fees payable to
B-34
<PAGE>
the Investment Advisers, the fees payable to GSAM, the fees and expenses of the
Fund's custodian and subcustodians, transfer agency 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, the 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 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 a Fund's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to a distribution, authorized dealer
service plan or service plan compensation and expenses of the Trust's "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.
Each Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Funds (excluding transfer agency fees estimated to be
0.04% of average daily net assets (applicable to the Growth and Income Fund and
Mid Cap Fund only), management fees and fees under service, distribution and
authorized dealer service plans, taxes, interest, brokerage fees and
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.06%, 0.11%, 0.06%, 0.24%, 0.24% per annum of the average
daily net assets, respectively, of the CORE U.S. Equity Fund, Growth and Income
Fund, Mid Cap Fund, International Fund, Asia Growth Fund and Emerging
Markets Fund. Such limits are calculated monthly and, although it has no
current intention to do so, may be discontinued or modified by the Investment
Adviser at 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 Investment Adviser's costs
of performing certain accounting services not being provided by the Funds'
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE U.S. Equity Fund $110,581 N/A
Growth and Income Fund 0 106,725
Growth Fund N/A N/A N/A
Mid Cap Fund/2/ 85,815 N/A
International Fund N/A N/A
Asia Growth Fund/3/ 0 135,905
- --------------------
</TABLE>
1 Not operational.
2 Commenced operations on August 1, 1995.
3 Commenced operations on July 8, 1994.
B-35
<PAGE>
Each Investment Adviser has voluntarily agreed to reduce the fees payable
to it by a Fund (to the extent of its fees) by an amount (if any) that the
Fund's expenses would exceed the expense limitations applicable to such Fund
imposed by states securities administrators, as such limitations may be lowered
or raised from time to time. These expense limitations apply to the management
fees paid by each Fund, but do not apply to taxes, interest, brokerage fees and
distribution, authorized dealer and service fees and, where permitted,
extraordinary expenses such as for litigation. The Investment Advisers will
reduce their respective fees by the amount of such excess in amounts
proportionate to such management fees.
Currently, the most restrictive expense limitation of state securities
commissions of which the Trust is aware is 2-1/2% of a Fund's average daily net
assets up to $30 million, 2% of the next $70 million of such assets and 1-1/2%
of such assets in excess of $100 million.
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
__________________, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, _____________________ prepares the Trust's
federal and state tax returns, and provides consultation and assistance on
accounting, internal control and related matters.
B-36
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment 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. A Fund will not deal with Goldman Sachs in
any transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, the Investment
Advisers are generally required to give primary consideration to obtaining the
most favorable price and efficient execution under the circumstances. This
means that an Investment Adviser will generally seek to execute each transaction
at a price and commission, if any, which provide the most favorable total cost
or proceeds reasonably attainable in the circumstances. While the Investment
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 Investment Advisers will consider
research and investment services provided by brokers or dealers who effect or
are parties to portfolio transactions of a Fund, the Investment 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 statistical and economic data and research reports on particular
companies and industries. Such services are used by the Investment 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 Investment Advisers in
providing management services for the Trust. In addition, the Investment
Advisers are authorized to take into account sales of shares of the Funds and
other funds in the Goldman Sachs Group of Funds in allocating purchase and sale
orders of portfolio securities provided that the Investment Advisers believe
that the quality of the transaction and commissions comparable to other
qualified terms.
On occasions when an Investment 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 Investment Adviser or an affiliate acts as investment adviser or
subadviser), the Investment Adviser, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for a 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 Investment
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
B-37
<PAGE>
rates and whether the broker provides research and investment services. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Trustees.
Subject to the above considerations, the Investment 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 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.
In addition, Goldman Sachs, as a member firm of the New York Stock
Exchange, may effect exchange transactions and receive compensation therefor if
expressly so authorized in a written contract with the Trust. The Trust on
behalf of each Fund has entered into such a contract with Goldman Sachs.
Goldman Sachs will provide the Trust at least annually with a statement setting
forth the total amount of all compensation retained by Goldman Sachs in
connection with effecting transactions for the accounts of the Funds. The
Trustees will review and approve all the Fund's portfolio transactions with
Goldman Sachs and the compensation received by Goldman Sachs in connection
therewith. The Trust, of course, will effect its portfolio transactions in a
manner consistent with all applicable laws.
B-38
<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
- ----------------
CORE Large Cap Growth Fund
CORE U.S. Equity Fund
Growth and Income Fund
Growth Fund
Mid Cap Fund/(3)/
International Fund
Asia Growth Fund
Emerging Markets Fund
January 31, 1996
- ----------------
Select Equity Fund $ 121,424 $ 0(0%)/(2)/ $ 148,427,497(0%)/(3)/ -0-
Growth and Income Fund 841,605 71,218(8%)/(2)/ 425,040,430(9%)/(3)/ -0-
Mid-Cap Fund/(3)/ 315,212 40,935(13%)/(1)/ 142,547,552(11%)/(2)/ -0-
International Fund 1,260,992 13,629(1%)/(2)/ 359,700,166(1%)/(3)/ -0-
Asia Growth Fund 1,676,525 3,778(0%)/(2)/ 247,662,049(2%)/(3)/ -0-
January 31, 1995
- ----------------------------
CORE U.S. Equity Fund $ 119,192 $ 0 (0%)/(1)/ $ 99,616,396(0%)/(2)/ -0-
Growth and Income Fund 637,080 77,404(12%)/(1)/ 468,165,610(7%)/(2)/ -0-
International Fund 1,799,525 0(0%)/(1)/ 546,364,113(0%)/(2)/ -0-
Asia Growth Fund/(4)/ 1,002,148 67,754(7%)/(1)/ 171,880,775(2%)/(2)/ -0-
</TABLE>
B-39
<PAGE>
<TABLE>
<CAPTION>
January 31, 1994
- ----------------
<S> <C> <C> <C> <C>
CORE U.S. Equity Fund $ 187,041 $ 3,857(2%)/(1)/ $306,043,566(1%)/(2)/ -0-
Growth and Income Fund/(5)/ 2,974,075 274,704(9%)/(1)/ 74,091,306(27%)/(2)/ -0-
International Fund/(6)/ 765,594 0(0%)/(1)/ 202,360,486(0%)/(2)/ -0-
- ----------------------------------
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
(3) Mid-Cap Equity Fund commenced operations on August 1, 1995.
(4) Asia Growth Fund commenced operations on July 8, 1994.
(5) Growth and Income Fund commenced operations on February 5, 1993.
(6) International Fund commenced operations on December 1, 1992.
B-40
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: [ insert names of brokers.] As of
January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands): [ Insert name of fund, broker name and dollar amount.]
NET ASSET VALUE
Under the Act, theTrustees 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 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) divided by the number of shares outstanding 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 a 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 Nasdaq National Market ("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)
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 price; (c) exchange traded options and futures contracts will be
valued at the last sale price in the market where such contracts are principally
traded; (d) 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; (e) debt securities, other than money market instruments, will be
valued on the basis of dealer-supplied quotation or by using a pricing service
approved by the Trustees if such prices are believed by the Investment Advisers
to accurately represent market value. Money market instruments, which are
defined as those debt securities with a remaining maturity of 60 days or less,
will be valued at amortized costs; (f) overnight repurchase agreements will be
valued at cost and term repurchase agreements will be valued at the average of
bid quotations obtained daily from at least two recognized dealers; (g) OTC
options will be valued by an independent unaffiliated broker identified by the
portfolio manager/trader and contacted by the custodian bank; and (h) all other
securities, including those for which a pricing service supplies no quotation or
a quotation that is believed by the portfolio manager/trader to be inaccurate,
will be valued at fair value in accordance with procedures established by the
Trustees.
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
B-41
<PAGE>
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 value
is 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 the Funds'
calculation of net asset value unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment may
be made.
The proceeds received by each Fund and each other series of the Trust (as
defined herein under "Shares of the Trust") established by the Trustees for each
issue or sale of its shares, and all net investment income, realized and
unrealized gain and proceeds thereof, subject only to the rights of creditors,
will be specifically allocated to such series 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 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 Fund 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 returns 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 (net asset value in the
case of Institutional and Service Shares) 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 (net asset value in
the case of Institutional and Service Shares) with all distributions reinvested
at the beginning of such period equal to the actual total value of such
investment at the end
B-42
<PAGE>
of such period. The following tables indicate the total return (capital changes
plus reinvestment of all distributions on a hypothetical investment of $1,000 in
the Funds) 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, Changing Times, Financial World, Forbes, Fortune, Money, 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 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 measure 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 account (MMDAs), checking accounts, saving 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; (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 Emerging Markets Free Index, Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data; and (t)
the FT-Actuaries Europe and Pacific Index. 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 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 a Fund to calculate its performance figures.
The CORE Large Cap Growth Fund and Growth Fund were organized on May 1,
1997 and have no operating or performance history prior thereto. However, in
accordance with interpretive positions
B-43
<PAGE>
expressed by the staff of the Securities and Exchange Commission, the Funds have
adopted the adjusted performance record of a Separate Account for periods prior
to the Funds' commencement of operations. Any quotation of performance data of
these Funds 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 has been adjusted downward based on the expenses
applicable to Institutional and Service Shares to reflect the expenses expected
to be incurred by the Funds as stated in the Expense table in the Prospectus.
These expenses include any charges imposed on and other operating expenses.
Total return quotations will be calculated pursuant to SEC approved methodology.
Prior to [____________], each 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, each Separate Account was not registered as an investment
company under the 1940 Act and therefore was not subject to certain investment
restrictions and operational requirements that are imposed on investment
companies by the 1940 Act. If the Separate Account had been registered as an
investment company under the 1940 Act, the Separate Account's performance may
have been adversely affected by such restrictions and requirements. On
[___________], Separate Account transferred a substantial portion of its assets
to the Fund in exchange for Fund shares.
B-44
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---------- ---------- ------
<S> <C> <C> <C>
CORE U.S. 5/24/91* ended
Equity Fund 1/31/97
Class A Shares
- -Assumes 5.5% sales charge
- -Assumes no sales charge
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge
- -Assumes no sales charge
2/1/92 five years
ended
1/31/97
- -Assumes 5.5% sales charge
- -Assumes no sales charge
CORE U.S. Equity Fund-
Institutional Shares 6/15/95* ended
1/31/96
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge 20.14%**
</TABLE>
B-45
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund Class A Shares 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
International
Fund 12/1/92* ended
Class A Shares 1/31/97
- -Assumes 5.5% sales charge %
%
- -Assumes no sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-46
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/97
Class A Shares
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
Mid Cap ended
Fund-Institutional 8/1/95* 1/31/97
Shares
- -Assumes 5.5% sales charge N/A
%**
- -Assumes no sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-47
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
CORE U.S. 5/24/91* ended
Equity Fund 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
CORE U.S. Equity Fund- 6/15/95* ended
Institutional Shares 1/31/97
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge %**
</TABLE>
B-48
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
International
Fund 12/1/92* ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-49
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/95 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
Mid Cap ended
Fund-Institutional 8/1/96* 1/31/97
Shares
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge %**
one year
ended
2/1/95 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
================================================================================
* Commencement of Operations
** An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
B-50
<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived from 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
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
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 also 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 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 calculations with respect to each class of shares of a Fund for the
same period will differ.
SHARES OF THE TRUST
The Trust was established as a Maryland corporation by Articles of
Incorporation dated ________ and reorganized as part of Goldman Sachs Trust, a
Delaware business trust, by a Declaration of Trust dated January 28, 1997. Each
of the Funds became a series of the Trust pursuant to a reorganization which
occurred 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 following shares of the Mid-Cap Fund
into two classes: Institutional and Service Shares. CORE U.S. Equity Fund,
Growth and Income Fund, International Fund and the Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares. As of January 31, 1997, there were no Service Shares
of any Fund outstanding. Each other series of the Trust has Class A Shares and
Class B Shares outstanding.
Each Institutional Share, Service Share, Class A Share and Class B Share of
a Fund represents a proportionate interest in the assets belonging to 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
B-51
<PAGE>
Shares, fees under Distribution and Authorized Dealer Service Plans are borne
exclusively by Class A Shares or Class B Shares and transfer agency fees are
borne at different rates by Class A Shares or Class B 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 Internal Revenue Service. Each class of shares may have different minimum
investment requirements and is entitled to different shareholder services.
Currently, shares of a class may be exchanged only for shares of the same or an
equivalent class of another fund. See "Exchange Privileges" 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.
Institutional Shares may pay a transfer agency fee equal to a percentage of the
average daily net assets of a Fund attributable to such class.
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 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. Service Shares may pay a transfer agency
fee equal to a percentage of the average daily net assets of a 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. Except for the CORE U.S.
Equity Fund, International Fund, Asia Growth Fund and Emerging Markets Fund,
Goldman Sachs has agreed not to impose any distribution fee. Goldman Sachs has
no current intention of modifying or discontinuing such limitation but may do so
in the future at its discretion. 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 A Shares pay a transfer
agency fee equal to $12,000 per year plus $7.50 per account together with out-
of-pocket and transaction related expenses.
Class B Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B Shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B Shares. Class B Shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares and Class B
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.
B-52
<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 relevant 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 April 15, 1997, [insert name, address, 5% or more holder and Fund
name] outstanding shares.
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 directors from the separate voting requirements of Rule 18f-
2.
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. The 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 and CORE Lareg Cap Growth Fund,
Growth Fund and EMergind Markets Fund intends to elect and each other Fund has
elected to be treated, and intends to continue to qualify for each taxable year
as a regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income 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 annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities; (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign currencies); and
(iii) foreign currencies and foreign currency options, futures and forward
contracts that are not directly related to the Fund's principal business of
investing in stocks or securities or options and futures with respect to 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
B-53
<PAGE>
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 such entities that earn fee
income, rental income or other nonqualifying income. In addition, future
Treasury 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 accordance 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 and 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 at least
annually to its shareholders all or substantially all of its investment company
taxable income and net capital gain. 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 Asia Growth
Fund or International Fund 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 fails to distribute at least 90% of its investment
company taxable income or otherwise 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.
B-54
<PAGE>
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 did not pay
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 treated
as if they were paid by the Fund and received by such shareholders 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 net capital gains, if any, during
the eight years following the year of the loss. [insert name of funds that have
capital loss carry forwards] 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.
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 applicable 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, a 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 the
applicable Fund's distributions to shareholders.The short-short test described
above may limit a Fund's ability to use options, futures and forward
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 derivatives such as interest rate or
currency 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.
A Fund's investments in zero coupon securities or other securities bearing
original issue discount or, if the Fund elects to include market discount in
income currently, market discount, will generally cause
B-55
<PAGE>
it to realize income prior to the receipt of cash payments with respect to these
securities. The mark to market rules applicable to certain options, futures and
forward contracts, as described above, may also require that income or gain be
recognized without a concurrent receipt of cash. In order 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.
Each Fund (other than CORE U.S. Equity Fund) anticipates that it will be
subject to foreign taxes on its income (possibly including, in some cases,
capital gains) from certain 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 International Fund, Asia Growth Fund and Emerging Markets Fund,
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 applicable 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 International Fund, Asia Growth Fund and Emerging Markets Fund make
this election, which is not currently anticipated, their 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
the International Fund, Asia Growth Fund and Emerging Markets 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 Asia Growth Fund or
International 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 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 International Fund, Asia Growth Fund and Emerging Markets Fund
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 Funds.
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 International Fund, Asia Growth Fund and Emerging Markets
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 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 its investment company taxable income.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as inherent in a convertible bond) in certain non-U.S.
corporations that receive at least 75% of their annual
B-56
<PAGE>
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 such 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 be able to pass
through to its shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election would require the Fund to recognize taxable income or gain without
the 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 will be eligible,
subject to certain holding period and debt-financing restrictions, for the 70%
dividends received deduction for corporations. 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 International Fund, Asia
Growth Fund and Emerging Markets Fund 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, as computed for
federal income tax purposes, will first reduce a shareholder's tax basis in his
or her shares and, after such basis is reduced to zero, will constitute capital
gains to a shareholder who holds his or her 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
B-57
<PAGE>
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
U.S. SHAREHOLDERS - SALE OF SHARES
==================================
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise (except
as described in the next sentence) short-term. If, however, 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. 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. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
Shareholders who, as to the United States, 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. 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 the 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 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 Asia Growth
Fund or International Fund to treat qualified foreign taxes it pays as passed
through to shareholders (as described above), but they may not be able to claim
a U.S. tax credit or deduction with respect to such taxes.
Any gain realized by a 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
B-58
<PAGE>
other conditions are met. Non-U.S. investors should consult their tax advisers
about the applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
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.
It is anticipated that each series of the Trust will be reorganized on
April 30, 1997, or as soon thereafter as practicable, into newly established
series of a Delaware business trust (the "Delaware Trust"). The initial
shareholder of the CORE Large Cap Growth Fund, Growth Fund and Emerging Markets
Fund has approved (i) the reorganization of the Trust into the Delaware Trust
and any and all matters incidental thereto, including the election of Trustees
of the Delaware Trust, (ii) an Investment Agreement between the Advisers and the
Delaware Trust on behalf of such Trust's series corresponding to the Fund, and
(iii) distribution and authorized dealer service plans with respect to such
series' Class A and Class B Shares and a service plan with respect to such
series' Service Shares, and has ratified the selection of the Delaware Trust's
independent public accountants. In the event that the shareholders of the other
Funds of the Trust do not approve the reorganization, the CORE Large Cap Growth
Fund, Growth Fund and Emerging Markets Fund may not be reorganized into the
Delaware Trust.
SHAREHOLDER AND TRUSTEE LIABILITY
=================================
DELAWARE TRUST. Under Delaware Law, the shareholders of the Delaware Trust
--------------
are not generally subject to liability for the debts or obligations of the
Delaware Trust. Similarly, Delaware Law provides that a series of the Delaware
Trust will not be liable for the debts or obligations of any other series of the
Delaware 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 proposed Declaration of Trust of the
Delaware Trust contains an express disclaimer of shareholder liability for acts
or obligations of a series. 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 of the Delaware Trust provides for
indemnification by the relevant series for all loss suffered by a
shareholder
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<PAGE>
as a result of an obligation of the series. The Declaration of Trust of the
Delaware 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 of the Delaware 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.
The Declaration of Trust of the Delaware 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 Trustees 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.
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 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 the 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>
Appendix A
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
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.
- ----------
/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 the
Fund's fiscal year end.
1-A
<PAGE>
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 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 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 very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarding 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 predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 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 is the highest rating within the speculative grade category.
2-A
<PAGE>
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.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
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 assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-one offices around the world, Goldman Sachs employs over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. The number one lead manager of U.S. common stock offerings for the
past six years (1989-1994) with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking excludes REITs, Trusts, Rights
====================================
and closed-end Fund offerings
2-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
3-B
<PAGE>
Appendix C
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.
1-C
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS EMERGING MARKETS EQUITY FUND
SERVICE SHARES
(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 Service Shares of Goldman Sachs Large Cap Growth Fund,
Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs Growth and Income Fund,
Goldman Sachs Growth Fund, Goldman Sachs Mid-Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Asia Growth Fund and Goldman Sachs
Emerging Markets Equity Fund, dated May 1, 1997, as amended and/or supplemented
from time to time (the "Prospectus"), which may be obtained without charge from
institutions ("Service Organizations") that hold Service Shares for the benefit
of their customers, 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..........................
Investment Policies...................
Investment Restrictions...............
Management............................
Portfolio Transactions and Brokerage..
Net Asset Value.......................
Taxation..............................
Performance Information...............
Financial Statements..................
Shares of the Trust...................
Other Information.....................
Service Plan..........................
Appendix A:...........................
Appendix B:...........................
Appendix C:...........................
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
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
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 CORE Large Cap Growth Fund,
Goldman Sachs Growth and Income Fund,
GOLDMAN SACHS ASSET Goldman Sachs Growth Fund, and
MANAGEMENT INTERNATIONAL Goldman Sachs Mid Cap Equity Fund,
Investment Adviser to: One New York Plaza
Goldman Sachs International Equity New York, New York 10004
Fund
Goldman Sachs Asia Growth Fund,
Goldman Sachs Emerging Markets Equity Fund
140 Fleet Street
London, England EC4A 2BJ
Toll free (in U.S.).......800-621-2550
<PAGE>
INTRODUCTION
Goldman Trust, Inc. (the "Trust") is an open-end, management investment
company currently offering, through this Additional Statement, including Goldman
Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"), Goldman Sachs
CORE U.S. Equity Fund ("CORE U.S. Equity Fund"), Goldman Sachs Growth and Income
Fund ("Growth and Income Fund"), Goldman Sachs Growth Fund ("Growth Fund"),
Goldman Sachs Mid Cap Fund ("Mid Cap Equity Fund"), Goldman Sachs International
Equity Fund ("International Fund"), Goldman Sachs Asia Growth Fund ("Asia Growth
Fund") and Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets
Fund")(individually, a "Fund," or collectively, the "Funds").
The Trust was organized under the laws of the State of Maryland on
September 27, 1989 and was reorganized as part of a Delaware business trust on
May 1, 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 three
additional series, and additional series may be added in the future from time to
time. CORE Large Cap Growth Fund, CORE U.S. Equity Fund, Growth and Income
Fund, Growth Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund currently offer four classes of shares: Institutional Shares, Service
Shares, Class A Shares and Class B Shares. Mid Cap 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 CORE
Large Cap Growth Fund, Growth and Income Fund, Growth Fund and Mid Cap Fund.
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman Sachs,
serves as investment adviser the CORE U.S. Equity Fund. Goldman Sachs Asset
Management International ("GSAMI"), an affiliate of Goldman Sachs, serves as
investment adviser to the International Fund, Asia Growth Fund and Emerging
Markets Fund. GSAM, GSFM and GSAMI are each sometimes referred to individually
as an "Investment Adviser" and collectively, as the "Investment Advisers."
Goldman Sachs serves as each Fund's distributor and transfer agent. Each Fund's
custodian is State Street Bank and Trust Trust ("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.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual and money market funds, including fixed income and
equity funds, and a range of related services. MFG is part of GSAM, a separate
operating division of Goldman Sachs. All products are designed to provide
clients with the benefit of the expertise of GSAM and its affiliates in security
selection, asset allocation, portfolio construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority
that Goldman Sachs places on serving client interests. As MFG clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain portfolio and account information. The
AA can also answer inquiries about rates of return, portfolio composition and
holdings and guide shareholders through operational details. An MFG client can
B-3
<PAGE>
also utilize SMART/SM/ personal computer software system which allows holders to
purchase and redeem shares and also obtain portfolio and account information
directly.
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.
INVESTING IN EMERGING MARKETS, INCLUDING ASIA
=============================================
Asia Growth Fund and Emerging Markets Fund are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of Emerging Countries issuers (in the case of
Emerging Markets Fund) 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. In addition, certain of Asia
Growth Fund's and Emerging Markets Fund's potential investment and management
techniques entail special risks. There can be no assurance that either Fund
will achieve its investment objective. GSAMI believes that Asia offers an
attractive investment environment and that new opportunities will continue to
emerge in the years ahead. Asia Growth Fund concentrates on companies that
GSAMI believes are taking full advantage of the region's growth and that have
the potential for long-term capital appreciation. See "Investment Objectives and
Policies" and "Risk Factors" in the Prospectus and "Emerging Country Securities"
in this Additional Statement.
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 Asian 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 Asian
markets may also affect a Fund's ability to accurately value their portfolio
securities or to acquire or dispose of securities at the price and time they
wish to do so or in order to meet redemption requests.
B-4
<PAGE>
Transaction costs, including brokerage commission 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 Asia Growth Fund and Emerging Markets Fund. A
Fund may be required to establish special custodial or other arrangemetns 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 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 Fund's assets.
Asia Growth 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."
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.
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 Asia Growth Fund is uninvested and no
return is earned on such assets. The inability of Asia Growth Fund to make
intended security purchases or sales due to
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settlement problems could result either in losses to Asia Growth Fund due to
subsequent declines in value of the portfolio securities or, if Asia Growth Fund
has entered into a contract to sell the securities, could result in possible
liability to the purchaser.
CORE LARGE CAP GROWTH FUND AND CORE U.S. EQUITY FUND
- ----------------------------------------------------
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of CORE Large Cap Growth Fund and CORE U.S. Equity
Fund 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 annual gross
income be derived from the sale or other disposition of stocks or securities
(including options and futures contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, the
Funds will need to hold cash balances to satisfy shareholder redemption
requests. Such cash balances will normally range from 2% to 5% of the Fund's
net assets. The Funds may purchase futures contracts on the S&P BARRA Growth
Index (in the case of CORE Large Cap Growth Fund) or the S&P 500 Index (in the
case of CORE U.S. Equity Fund) in order to keep a Fund's effective equity
exposure close to 100%. For example, 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 sophisticated
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 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,
such securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Investment 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 Investment 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 nature of 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 Funds
use 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 FUND
- ------------------
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International 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.
GSAM and GSAMI believes that the high historical returns and less efficient
pricing of foreign markets create favorable conditions for International Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in 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 Fund's portfolio through a three-stage
investment process. Because International Fund is a long-term holder of stocks,
the portfolio managers adjust International 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 Investment Advisers
seek 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.
Within these industries the Investment Advisers seek 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 always act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAM'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. See "Investment Policies" and "Advisory and Administrative
Services."
The members of GSAM and 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 Fund may only invest in debt
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<PAGE>
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 bonds 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 the Growth and Income Fund, Growth Fund, Growth Fund, Mid Cap Fund
and Emerging Markets Fund to dispose of a particular security when necessary to
meet its 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 Investment Advisers could find it more 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 these 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 the Growth and
Income Fund, Growth Fund, Mid Cap Funds and Emerging Markets Fund may invest,
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 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 Investment 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 in 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.
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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 tax and accounting purposes which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
a Fund's distribution obligations. See "Taxation."
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 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-BACKED AND ASSET-BACKED SECURITIES
- -------------------------------------------
Mortgage-backed securities represent direct or indirect participation in,
or are collateralized by and payable from, mortgage loans secured by real
property. 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.
Mortgage-backed and 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 which may
increase the volatility of such investments relative to similarly rated debt
securities. 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 mortgage-backed and 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
U.S. Government securities and other mortgage-backed and 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 owned 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
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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. Each Fund, other than
CORE Large Cap Growth Fund and CORE U.S. Equity Fund, may also purchase and
write options on futures contracts. CORE Large Cap Growth Fund and CORE U.S.
Equity Fund may only purchase and sell futures contracts on the S&P/BARRA Growth
Index or S&P 500 Index, respectively. The other Funds may purchase and sell
futures contracts based upon 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, except for CORE
Large Cap Growth Fund and CORE U.S. Equity Fund, 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 certain 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 interest 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 Large Cap
Growth Fund and CORE U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) 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 the Fund has
acquired or expects to acquire.
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 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 and
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts in
order to hedge against an anticipated rise in interest rates or a decline in
market prices or (with the exception of CORE Large Cap Growth Fund and CORE U.S.
Equity Fund) foreign currency rates that would adversely affect the dollar value
of such Fund's portfolio securities. Such futures contracts may (except in the
case of CORE Large Cap
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Growth Fund and CORE U.S. Equity Fund) include contracts for the future delivery
of securities held by the Fund or securities with characteristics similar to
those of the Fund's portfolio securities. Similarly, each Fund (other than CORE
Large Cap Growth Fund and CORE U.S. Equity Fund) may sell futures contracts on a
particular currency in which its portfolio securities are quoted or denominated
or in one currency 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 Investment 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 Investment 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 such Fund's securities portfolio. When hedging of this character is
successful, any depreciation in the value of portfolio securities will be
substantially offset by appreciation in the value of the futures position. On
the other hand, any unanticipated appreciation in the value of a Fund's
portfolio securities would be substantially offset by a decline in the value of
the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when the 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 (upon exercise of the option)
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
(except for CORE Large Cap Growth Fund and CORE U.S. Equity Fund) 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
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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 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
denominated or quoted 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 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
futures contracts and (except for CORE Large Cap Growth Fund and CORE U.S.
Equity Fund) will engage in 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, 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,
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 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 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 may 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
- --------------------------------------------
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WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest, although CORE Large Cap Growth
Fund and CORE U.S. Equity Fund have no present intention of doing so. 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 the Fund would have deposited with its
custodian cash or liquid, high grade debt securities with a value at least equal
to the exercise price of the put option. The purpose of writing such options is
to generate additional income for a 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.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets, as permitted by applicable law, (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 or any other 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, as permitted by
applicable law, 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 counter party to such option. Such purchases
are referred to as "closing purchase transactions."
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<PAGE>
PURCHASING OPTIONS. Each Fund may purchase put and call options on any
securities in which it may invest or options on any securities index based on
securities in which it may invest, although Select Equity Fund has no present
intention of doing so. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it has
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.
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, if any, 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.
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
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<PAGE>
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 (the "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 Investment Advisers. An exchange, board of trade or
other trading facility may order the liquidations 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 an Investment Adviser's ability to
predict future price fluctuations and the degree of correlation between the
options and securities markets.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
- ---------------------------------------
Each Fund may invest in shares of 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 the 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 Trust Act of 1940, as amended (the "Act"). REITs
(especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
- ----------------------------------
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<PAGE>
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 an Investment
Adviser for investment by the Fund. CORE U.S. Equity Fund has 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.
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
Investment 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. International Fund, Asia Growth Fund and Emerging Markets
Fund 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 are generally 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
B-16
<PAGE>
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 the 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 U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) may
also 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.
A Fund (other than CORE Large Cap Growth Fund and CORE U.S. Equity Fund)
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".
EMERGING COUNTRY SECURITIES
- ---------------------------
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Growth and Income Fund,
Growth Fund and Mid Cap Fund may enter into forward foreign currency exchange
contracts for hedging purposes.
B-17
<PAGE>
International Fund, Asia Growth Fund and Emerging Markets Fund may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
increase total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are generally charged at any stage for
trades.
At the maturity of a forward contract, 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 purchase 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 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 Investment 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.
International Fund, Asia Growth Fund and Emerging Markets Fund 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. International Fund, Asia Growth Fund and Emerging
Markets Fund 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, as permitted by
applicable law 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 International Fund, Asia Growth Fund and Emerging
Markets Fund forward contracts entered into to increase total return. If the
value of the securities placed in the segregated account declines, additional
cash or securities will be placed in the account on a daily basis
B-18
<PAGE>
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 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.
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.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except
than CORE Large Cap Growth Fund and CORE U.S. Equity Fund) may write (sell)
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.
International Fund, Asia Growth Fund and Emerging Markets Fund may use
options on currency to cross-hedge, which involves writing or purchasing options
on one currency to hedge against changes in exchange rates for a different
currency with a pattern of correlation. In addition, International Fund, Asia
Growth Fund and Emerging Markets Fund may purchase call options on currency to
seek to increase total return when the Adviser anticipates that the currency
will appreciate in value, but the securities 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 such 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 such 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 upt and call options, see
"Written Covered Options" above.
B-19
<PAGE>
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. 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 such 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 and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying portfolio securities.
In addition to using options for the hedging purposes described above,
International Fund, Asia Growth Fund and Emerging Markets Fund may use options
on currency to seek to increase total return. International Fund, Asia Growth
Fund and Emerging Markets Fund 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, International Fund, Asia Growth Fund and Emerging
Markets Fund may forego the opportunity to profit from an increase in the market
value of the underlying currency. Also, when writing put options,
International Fund, Asia Growth Fund and Emerging Markets Fund 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.
International Fund, Asia Growth Fund and Emerging Markets Fund would
normally purchase call options to seek to increase total return in anticipation
of an increase in the market value of a currency. International Fund, Asia
Growth Fund and Emerging Markets 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 International Fund,
Asia Growth Fund and Emerging Markets Fund would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by either
Fund for the purpose of benefiting from a decline in the value of currencies
which it does not own. International Fund, Asia Growth Fund and Emerging
Markets 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 Funds 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
B-20
<PAGE>
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.
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
- --------------
The International Fund, Asia Growth Fund and Emerging Markets Fund may,
with respect to 5% of their net assets, enter into currency swaps for hedging
purposes and to seek to increase total return. Inasmuch as swaps are entered
into for good faith hedging purposes or are offset by a segregated account as
described below, the Investment Advisers believe that swaps do not constitute
senior securities as defined in the Act, and, accordingly, will not treat them
as being subject to a Fund's borrowing restrictions. An amount of cash or
liquid assets, as permitted by applicable law having an aggregate net asset
value at least equal to the entire amount of the payment stream payable by the
Fund will be maintained in a segregated account by the Fund's custodian.
A Fund will not enter into any currency swap unless the credit quality of
the unsecured senior debt or the claims-paying ability of the other party
thereto is considered to be investment grade by the Investment Adviser. If
there is a default by the other party to such a transaction, the 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. However, the staff of the SEC takes
the position that currency swaps are illiquid investments that are subject to
each Fund's 15% limitation on such investments.
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
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<PAGE>
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 an Investment Adviser to be of good
standing, and when, in the judgment of the Investment Adviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If an Investment Adviser determines 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 average 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, as permitted by applicable law 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.
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 Investment 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
B-22
<PAGE>
extent that the Fund invests in a money market fund for which an Investment
Adviser or any of its affiliates acts as adviser, the advisory and
administration fees payable by the Fund to an Investment 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 Investment 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 the Fund's custodian. The repurchase
price may be higher than the purchase price, the difference being income to a
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to a Fund together with the repurchase price on repurchase. In
either case, the income to a Fund is unrelated to the interest rate on the
security subject to the repurchase agreement.
For purposes of the Act and, generally, for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by the Fund
or as being collateral for a loan by the Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of
the security. If the court characterizes the transaction as a loan and a Fund
has not perfected a security interest in the security, 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 Investment
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), 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 Investment 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 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 Funds. The investment objective of each Fund and all
other
B-23
<PAGE>
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. 1, asset coverage of at least 300% (as defined in the
Act), inclusive of any amounts borrowed, must be maintained at all times.
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 Funds. The investment objective of each other 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 each Fund's 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. 1, asset coverage of at
least 300% (as defined in the Act), inclusive of any amounts borrowed, must be
maintained at all times.
The Company may not on behalf of any Fund:
==========================================
(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 (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
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,
B-24
<PAGE>
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.
(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) Invest in companies for the purpose of excercising 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 borrowing exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
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.
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
B-25
<PAGE>
<TABLE>
<CAPTION>
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 (since June 1994)
Retired. 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 General Partner, Goldman Sachs, (since 1986);
One New York Plaza Chairman and Chief Executive Officer, Goldman
New York, NY 10004 Sachs Asset Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May 1996);
One New York Plaza & President formerly, President, MFS Retirement Services Inc.,
New York, NY 10004 of Massachusetts Financial Services (prior thereto).
John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since
One New York Plaza General Partner of Goldman Sachs (1990-1994 1966);
New York, NY 10004 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 (since 1978);
Taylor Hall Director of Bryn Mawr College Josiah Macy,
Bryn Mawr, PA 19010 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, 47 Trustee Director and Vice President of Goldman
One New York Plaza Funds Management Inc. (from April 1990 to
New York, NY 10004 Sachs November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994); Limited Partner,
Goldman Sachs (since December 1994).
</TABLE>
B-26
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman and Chief Executive Officer, MS
One Northfield Plaza #218 Communications Inc.(a company engaged in radio
Northfiled, IL 60093 broadcasting) (since November 1988),
Director, Federal Express Corporation 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; February 1987 to
retirement in August 1992) and Vice Chairman, Chief Financial and
Administrative Officer, prior thereto; Director American Information
Technologies Corporation; Director, Walgreen Co. (a retail drug store busi
ness); 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. (since
70 West Madison St. 1990); Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors)(January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration, Goldman
One New York Plaza 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
</TABLE>
B-27
<PAGE>
<TABLE>
<S> <C> <C>
4900 Sears Tower President 1992); Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
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 1985);
4900 Sears Tower President Manager of Shareholder Servicing of GSAM
Chicago, IL 60606 (since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of Goldman Sachs
85 Broad Street Asset Management (since February 1994); Vice
New York, NY 10004 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 Assistant Secretary Goldman Sachs (since Novem
New York, NY 10004 ber 1993 and May 1994, respectively ); Counsel
to the Funds Group, Goldman Sachs Asset
Management (since November 1993); Associate of Shereff Friedman, Hoffman & Goodman
(prior thereto).
*Steven E. Hartstein, 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 Robinson, 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
*Elizabeth D. Anderson, 27 Assistant Portfolio Manager, GSAM (since April 1996);
Junior One New York Plaza Secretary Portfolio Manager, Goldman Sachs Asset
</TABLE>
B-28
<PAGE>
<TABLE>
<S> <C> <C>
New York, NY 10004 Management (since 1993). Funds Trading
Assistant, GSAM (1993-1995). Compliance Analyst,Prudential Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor. As of April ___, 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.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
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
Fund. GSAM, One New York Plaza, New York, New York, a separate operating
division of Goldman Sachs, serves as investment adviser to CORE Large Cap Growth
Fund, Growth and Income Fund, Growth Fund and Mid Cap Fund. GSAMI, 140 Fleet
Street, London, England, EC4A 2BJ acts as the investment adviser to
International Fund, Asia Growth Fund and Emerging Markets Fund. See "Management"
in the Funds' Prospectus for a description of the applicable Investment
Adviser's duties as investment adviser or subadviser and GSAM's duties as
administrator 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 among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Frankfurt, George Town, Hong Kong, London, Madrid, 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 Investment 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' 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 Investment 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 Investment 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
B-29
<PAGE>
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 in International Fund's portfolio among various
currencies, GSAM and GSAMI 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, GSAM and
GSAMI 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 the International Fund's
investment objective and criteria.
Each Fund's management agreement provides that the Investment
Advisers may render similar services to others so long as the services provided
by the Investment Advisers thereunder are not impaired thereby.
The CORE Large Cap Growth Fund and Growth Fund management agreement was
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
January 28, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth Fund, Growth Fund
and Emerging Markets Fund). Each Fund's agreement will remain in effect until
June 30, 1998 and from year to year thereafter provided such continuance is
specifically approved at least annually by (a) the vote of a majority of the
outstanding voting securities of such Fund or a majority of the Trustees of the
Trust, and (b) the vote of a majority of the non-interested Trustees of the
Trust, cast in person at a meeting called for the purpose of voting on such
approval. Each advisory agreement will terminate automatically if assigned (as
defined in the Act) and is terminable at any time without penalty by the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the affected Fund on 60 days' written notice to the Investment
Adviser and by the Investment Adviser on 60 days' written notice to the
Trust.
Pursuant to the management agreements the Investment Advisers are entitled
to receive the fees listed below, payable monthly of such Funds average daily
net assets. In addition, the Investment Adviser voluntarily agreed to limit its
management fee to an annual rate also listed below:
Management with Management without
Fund Fee Limitations Fee Limitations
- ---- --------------- ---------------
GSAM
CORE Large Cap Growth Fund 1.00%
Growth and Income Fund 0.70%
Growth Fund
Mid Cap Fund 1.00%
GSFM
CORE U.S. Equity Fund 0.75%
B-30
<PAGE>
GSAMI
International Fund 1.00%
Asia Growth Fund 1.00%
Emerging Markets Fund
The Investment Advisers may discontinue or modify the above limitations in
the future at their discretion, although they have no current intention to do
so.
For the last three fiscal years the amounts of the advisory fees incurred
by each Fund then in existence were as follows:
1997 1996 1995
---- ---- ----
CORE Lareg Cap Growth Fund/1/ N/A N/A N/A
CORE U.S. Equity Fund/5/ $ 578,721 $462,255/2/
Growth and Income Fund 1,748,649 621,416
Growth Fund
Mid Cap Fund/4/ 391,234 N/A
International Fund/2,6/ 698,718 796,627
Asia Growth Fund/2,3/ 1,172,731 414,813
Emerging Markets Fund/1/
- ---------------------------
1 Not operational.
2 Does not give effect to the agreement (which was not in effect during such
fiscal years) by the Investment Advisers to limit management fees to 0.44%,
0.23% and 0.71% of CORE U.S. Equity Fund's, International Fund's and Asia
Growth Fund's average daily net assets.
3 Commenced operations on July 8, 1994.
4 Commenced operations on August 1, 1995.
5 Gives effect to the agreement (which was in effect as of June 15,1995) by
GSFM to limit management fees to 0.44% of the CORE U.S. Equity Fund's
average daily net assets. For the fiscal year ended January 31, 1996 and
1997, had limitations not been in effect, CORE U.S. Equity Fund would have
paid $679,759 and $____________, respectively, in investment management
fees.
6 For the fiscal years ended January 31, 1995, 1996 and 1997, International
Fund paid GSAMI subadvisory fees of $1,593,255, $1,397,436 and
$____________ (which does not include the effect of the waiver to 0.48 of
1%, which is currently in effect), respectively.
Pursuant to the management agreements, in addition to managing the
portfolio investments, the Investment Advisers responsibilities include, subject
to the general supervision of the Trustees, (a) providing supervision of all
aspects of the Trust's non-investment operations (the parties giving due
recognition to the fact that certain of such operations are performed by others
pursuant to agreements with each Fund), (b) providing the Trust, to the extent
not provided pursuant to its custodian and transfer agency agreements 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 Trust, (c) arranging, to the extent not provided
pursuant to such agreements, for the preparation, at the Trust's expense, of its
tax returns, reports to shareholders, periodic updating of the prospectuses and
reports filed with the SEC and other regulatory authorities, (d) providing the
Trust, 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 Trust's 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 Investment Advisers and Goldman Sachs
and their affiliates in the management of, or their interests in, other accounts
and other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede the Funds' investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Investment 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
B-31
<PAGE>
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 the Funds'
performance. Such transactions, particularly in respect to proprietary accounts
or customer accounts other than those included in the Investment 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 Investment 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 the good faith discretion of such
entities 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 Investment Advisers and/or the
affiliates will not initiate or recommend certain types of transactions in
certain securities or instruments with respect to which the Investment Advisers
and/or their affiliates are performing services or when position limits have
been reached.
In connection with their management of the Funds, the Investment Advisers
may have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs, J. Aron and other affiliates. An Investment Adviser
will not be under any obligation, however, to effect transactions on behalf of a
Fund 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
Investment 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 Investment Advisers in managing the
Funds.
The results of a Fund's investment activities may differ significantly from
the results achieved by an Investment Adviser and its 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 a
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 a Fund invests.
B-32
<PAGE>
In addition, certain principals and certain of the employees of the
Investment 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 Investment Adviser may enter into transactions and invest in
currencies or other 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 not have an incentive to assure that a Fund obtains 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 a Fund invests or which
may be based on the performance of the 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 their clients to take actions adverse to the interests of the client. To
the extent that affiliate 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 such 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 Fund shares acquired for its own account. A large redemption
of Fund shares by Goldman Sachs could significantly reduce the asset size of a
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 Investment 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 CORE U.S.Equity Fund, Growth and Income Fund, Mid
Cap Fund, International Fund and Asia Growth Fund; CORE Large Cap Growth Fund
and Growth Fund; and Emerging Markets Fund, dated February 1, 1993, as amended
as of January 30, 1996, January 28, 1997 and April 23, 1997, respectively.
Pursuant to the
B-33
<PAGE>
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 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. Goldman Sachs is not entitled to receive a fee
from the CORE U.S., International and Asia Growth and Emerging Markets Funds
with respect to the Institutional and Service Shares of such Funds. 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,
Goldman Sachs is entitled to receive a fee with respect to the Institutional and
Service Shares of the CORE Large Cap Growth Fund, Growth and Income Fund, Growth
Fund and Mid Cap Fund equal to 0.04% of the net assets of each Fund attributable
to such classes of shares. Transfer agency fees paid by a Fund with respect to
a particular class are allocated to the shares of such class.
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund's Institutional Class then in existence for transfer agency services
performed were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CORE Large Cap Growth Fund/4/ N/A N/A
CORE U.S. Equity Fund/1/ $11,571
Growth and Income Fund/3/ N/A
Growth Fund/4/
Mid Cap Fund/2/ 26,082
International Fund/3/ N/A
Asia Growth Fund/3/ N/A
Emerging Markets Fund/4/ N/A N/a
- ---------------------------
</TABLE>
1 The Institutional Class commenced operations on June 15, 1995.
2 Commenced operations on August 1, 1995.
3 Institutional classes were not in existence for the fiscal year ended
January 31, 1996.
4 Not operational.
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 borne by a Fund
include, without limitation, the fees payable to
B-34
<PAGE>
the Investment Advisers, the fees payable to GSAM, the fees and expenses of the
Fund's custodian and subcustodians, transfer agency 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, the 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 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 a Fund's shareholders and regulatory authorities,
any expenses assumed by a Fund pursuant to a distribution, authorized dealer
service plan or service plan compensation and expenses of the Trust's "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.
Each Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Funds (excluding transfer agency fees estimated to be
0.04% of average daily net assets (applicable to the Growth and Income Fund and
Mid Cap Fund only), management fees and fees under service, distribution and
authorized dealer service plans, taxes, interest, brokerage fees and
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.06%, 0.11%, 0.06%, 0.24%, 0.24% per annum of the average
daily net assets, respectively, of the CORE U.S. Equity Fund, Growth and Income
Fund, Mid Cap Fund, International Fund, Asia Growth Fund and Emerging
Markets Fund. Such limits are calculated monthly and, although it has no
current intention to do so, may be discontinued or modified by the Investment
Adviser at 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 Investment Adviser's costs
of performing certain accounting services not being provided by the Funds'
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CORE Large Cap Growth Fund/1/ N/A N/A N/A
CORE U.S. Equity Fund $110,581 N/A
Growth and Income Fund 0 106,725
Growth Fund N/A N/A N/A
Mid Cap Fund/2/ 85,815 N/A
International Fund N/A N/A
Asia Growth Fund/3/ 0 135,905
- --------------------
</TABLE>
1 Not operational.
2 Commenced operations on August 1, 1995.
3 Commenced operations on July 8, 1994.
B-35
<PAGE>
Each Investment Adviser has voluntarily agreed to reduce the fees payable
to it by a Fund (to the extent of its fees) by an amount (if any) that the
Fund's expenses would exceed the expense limitations applicable to such Fund
imposed by states securities administrators, as such limitations may be lowered
or raised from time to time. These expense limitations apply to the management
fees paid by each Fund, but do not apply to taxes, interest, brokerage fees and
distribution, authorized dealer and service fees and, where permitted,
extraordinary expenses such as for litigation. The Investment Advisers will
reduce their respective fees by the amount of such excess in amounts
proportionate to such management fees.
Currently, the most restrictive expense limitation of state securities
commissions of which the Trust is aware is 2-1/2% of a Fund's average daily net
assets up to $30 million, 2% of the next $70 million of such assets and 1-1/2%
of such assets in excess of $100 million.
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
__________________, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, _____________________ prepares the Trust's
federal and state tax returns, and provides consultation and assistance on
accounting, internal control and related matters.
B-36
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment 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. A Fund will not deal with Goldman Sachs in
any transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, the Investment
Advisers are generally required to give primary consideration to obtaining the
most favorable price and efficient execution under the circumstances. This
means that an Investment Adviser will generally seek to execute each transaction
at a price and commission, if any, which provide the most favorable total cost
or proceeds reasonably attainable in the circumstances. While the Investment
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 Investment Advisers will consider
research and investment services provided by brokers or dealers who effect or
are parties to portfolio transactions of a Fund, the Investment 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 statistical and economic data and research reports on particular
companies and industries. Such services are used by the Investment 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 Investment Advisers in
providing management services for the Trust. In addition, the Investment
Advisers are authorized to take into account sales of shares of the Funds and
other funds in the Goldman Sachs Group of Funds in allocating purchase and sale
orders of portfolio securities provided that the Investment Advisers believe
that the quarterly of the transaction and commissions comparable to other
qualified terms.
On occasions when an Investment 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 Investment Adviser or an affiliate acts as investment adviser or
subadviser), the Investment Adviser, to the extent permitted by applicable laws
and regulations, may aggregate the securities to be sold or purchased for a 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 Investment
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
B-37
<PAGE>
rates and whether the broker provides research and investment services. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Trustees.
Subject to the above considerations, the Investment 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 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.
In addition, Goldman Sachs, as a member firm of the New York Stock
Exchange, may effect exchange transactions and receive compensation therefor if
expressly so authorized in a written contract with the Trust. The Trust on
behalf of each Fund has entered into such a contract with Goldman Sachs.
Goldman Sachs will provide the Trust at least annually with a statement setting
forth the total amount of all compensation retained by Goldman Sachs in
connection with effecting transactions for the accounts of the Funds. The
Trustees will review and approve all the Fund's portfolio transactions with
Goldman Sachs and the compensation received by Goldman Sachs in connection
therewith. The Trust, of course, will effect its portfolio transactions in a
manner consistent with all applicable laws.
B-38
<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
- ----------------
CORE Large Cap Growth Fund
CORE U.S. Equity Fund
Growth and Income Fund
Growth Fund
Mid Cap Fund/(3)/
International Fund
Asia Growth Fund
Emerging Markets Fund
January 31, 1996
- ----------------
Select Equity Fund $ 121,424 $ 0(0%)/(2)/ $ 148,427,497(0%)/(3)/ -0-
Growth and Income Fund 841,605 71,218(8%)/(2)/ 425,040,430(9%)/(3)/ -0-
Mid-Cap Fund/(3)/ 315,212 40,935(13%)/(1)/ 142,547,552(11%)/(2)/ -0-
International Fund 1,260,992 13,629(1%)/(2)/ 359,700,166(1%)/(3)/ -0-
Asia Growth Fund 1,676,525 3,778(0%)/(2)/ 247,662,049(2%)/(3)/ -0-
January 31, 1995
- ----------------------------
CORE U.S. Equity Fund $ 119,192 $ 0 (0%)/(1)/ $ 99,616,396(0%)/(2)/ -0-
Growth and Income Fund 637,080 77,404(12%)/(1)/ 468,165,610(7%)/(2)/ -0-
International Fund 1,799,525 0(0%)/(1)/ 546,364,113(0%)/(2)/ -0-
Asia Growth Fund/(4)/ 1,002,148 67,754(7%)/(1)/ 171,880,775(2%)/(2)/ -0-
</TABLE>
B-39
<PAGE>
<TABLE>
<CAPTION>
January 31, 1994
- ----------------
<S> <C> <C> <C> <C>
CORE U.S. Equity Fund $ 187,041 $ 3,857(2%)/(1)/ $306,043,566(1%)/(2)/ -0-
Growth and Income Fund/(5)/ 2,974,075 274,704(9%)/(1)/ 74,091,306(27%)/(2)/ -0-
International Fund/(6)/ 765,594 0(0%)/(1)/ 202,360,486(0%)/(2)/ -0-
- ----------------------------------
</TABLE>
(1) Percentage of total commissions paid.
(2) Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
(3) Mid-Cap Equity Fund commenced operations on August 1, 1995.
(4) Asia Growth Fund commenced operations on July 8, 1994.
(5) Growth and Income Fund commenced operations on February 5, 1993.
(6) International Fund commenced operations on December 1, 1992.
B-40
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: [ insert names of brokers.] As of
January 31, 1997, the Trust held the following amounts of securities of its
regular broker/dealers, as defined in Rule 10b-1 under the Act, or their parents
($ in thousands): [ Insert name of fund, broker name and dollar amount.]
NET ASSET VALUE
Under the Act, theTrustees 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 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) divided by the number of shares outstanding 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 a 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 Nasdaq National Market ("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)
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 price; (c) exchange traded options and futures contracts will be
valued at the last sale price in the market where such contracts are principally
traded; (d) 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; (e) debt securities, other than money market instruments, will be
valued on the basis of dealer-supplied quotation or by using a pricing service
approved by the Trustees if such prices are believed by the Investment Advisers
to accurately represent market value. Money market instruments, which are
defined as those debt securities with a remaining maturity of 60 days or less,
will be valued at amortized costs; (f) overnight repurchase agreements will be
valued at cost and term repurchase agreements will be valued at the average of
bid quotations obtained daily from at least two recognized dealers; (g) OTC
options will be valued by an independent unaffiliated broker identified by the
portfolio manager/trader and contacted by the custodian bank; and (h) all other
securities, including those for which a pricing service supplies no quotation or
a quotation that is believed by the portfolio manager/trader to be inaccurate,
will be valued at fair value in accordance with procedures established by the
Trustees.
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
B-41
<PAGE>
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 value
is 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 the Funds'
calculation of net asset value unless the Trustees deem that the particular
event would materially affect net asset value, in which case an adjustment may
be made.
The proceeds received by each Fund and each other series of the Trust (as
defined herein under "Shares of the Trust") established by the Trustees for each
issue or sale of its shares, and all net investment income, realized and
unrealized gain and proceeds thereof, subject only to the rights of creditors,
will be specifically allocated to such series 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 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 Fund 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 returns 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 (net asset value in the
case of Institutional and Service Shares) 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 (net asset value in
the case of Institutional and Service Shares) with all distributions reinvested
at the beginning of such period equal to the actual total value of such
investment at the end
B-42
<PAGE>
of such period. The following tables indicate the total return (capital changes
plus reinvestment of all distributions on a hypothetical investment of $1,000 in
the Funds) 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, Changing Times, Financial World, Forbes, Fortune, Money, 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 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 measure 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 account (MMDAs), checking accounts, saving 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; (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 Emerging Markets Free Index, Salomon Brothers, Merrill
Lynch, Donaldson Lufkin and Jenrette or other providers of such data; and (t)
the FT-Actuaries Europe and Pacific Index. 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 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 a Fund to calculate its performance figures.
The CORE Large Cap Growth Fund and Growth Fund were organized on May 1,
1997 and have no operating or performance history prior thereto. However, in
accordance with interpretive positions
B-43
<PAGE>
expressed by the staff of the Securities and Exchange Commission, the Funds have
adopted the adjusted performance record of a Separate Account for periods prior
to the Funds' commencement of operations. Any quotation of performance data of
these Funds 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 has been adjusted downward based on the expenses
applicable to Institutional and Service Shares to reflect the expenses expected
to be incurred by the Funds as stated in the Expense table in the Prospectus.
These expenses include any charges imposed on and other operating expenses.
Total return quotations will be calculated pursuant to SEC approved methodology.
Prior to [____________], 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, Separate Account was not registered as an investment company under the
1940 Act and therefore was not subject to certain investment restrictions and
operational requirements that are imposed on investment companies by the 1940
Act. If the Separate Account had been registered as an investment company under
the 1940 Act, the Separate Account's performance may have been adversely
affected by such restrictions and requirements. On [___________], Separate
Account transferred a substantial portion of its assets to the Fund in exchange
for Fund shares.
B-44
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---------- ---------- ------
<S> <C> <C> <C>
CORE U.S. 5/24/91* ended
Equity Fund 1/31/97
Class A Shares
- -Assumes 5.5% sales charge
- -Assumes no sales charge
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge
- -Assumes no sales charge
2/1/92 five years
ended
1/31/97
- -Assumes 5.5% sales charge
- -Assumes no sales charge
CORE U.S. Equity Fund-
Institutional Shares 6/15/95* ended
1/31/96
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge 20.14%**
</TABLE>
B-45
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund Class A Shares 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
International
Fund 12/1/92* ended
Class A Shares 1/31/97
- -Assumes 5.5% sales charge %
%
- -Assumes no sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-46
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/97
Class A Shares
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
Mid Cap ended
Fund-Institutional 8/1/95* 1/31/97
Shares
- -Assumes 5.5% sales charge N/A
%**
- -Assumes no sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-47
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
CORE U.S. 5/24/91* ended
Equity Fund 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
CORE U.S. Equity Fund- 6/15/95* ended
Institutional Shares 1/31/97
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge %**
</TABLE>
B-48
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Growth
and Income 2/5/93* ended
Fund 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
2/1/96 one year
ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
International
Fund 12/1/92* ended
1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/96 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
B-49
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
- ---- ---- ------ ------
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
one year
ended
2/1/95 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
Mid Cap ended
Fund-Institutional 8/1/96* 1/31/97
Shares
- -Assumes 5.5% sales charge N/A
- -Assumes no sales charge %**
one year
ended
2/1/95 1/31/97
- -Assumes 5.5% sales charge %
- -Assumes no sales charge %
</TABLE>
================================================================================
* Commencement of Operations
** An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
B-50
<PAGE>
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived from 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
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Investment
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 also 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 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 calculations with respect to each class of shares of a Fund for the
same period will differ.
SHARES OF THE TRUST
The Trust was established as a Maryland corporation by Articles of
Incorporation dated ________ and reorganized as part of Goldman Sachs Trust, a
Delaware business trust, by a Declaration of Trust dated January 28, 1997. Each
of the Funds became a series of the Trust pursuant to a reorganization which
occurred 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 following shares of the Mid-Cap Fund
into two classes: Institutional and Service Shares. CORE U.S. Equity Fund,
Growth and Income Fund, International Fund and the Asia Growth Funds have been
classified into four classes: Institutional Shares, Service Shares, Class A
Shares and Class B Shares. As of January 31, 1997, there were no Service Shares
of any Fund outstanding. Each other series of the Trust has Class A Shares and
Class B Shares outstanding.
Each Institutional Share, Service Share, Class A Share and Class B Share of
a Fund represents a proportionate interest in the assets belonging to 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
B-51
<PAGE>
Shares, fees under Distribution and Authorized Dealer Service Plans are borne
exclusively by Class A Shares or Class B Shares and transfer agency fees are
borne at different rates by Class A Shares or Class B 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 Internal Revenue Service. Each class of shares may have different minimum
investment requirements and is entitled to different shareholder services.
Currently, shares of a class may be exchanged only for shares of the same or an
equivalent class of another fund. See "Exchange Privileges" 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.
Institutional Shares may pay a transfer agency fee equal to a percentage of the
average daily net assets of a Fund attributable to such class.
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 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. Service Shares may pay a transfer agency
fee equal to a percentage of the average daily net assets of a 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. Except for the CORE U.S.
Equity Fund, International Fund, Asia Growth Fund and Emerging Markets Fund,
Goldman Sachs has agreed not to impose any distribution fee. Goldman Sachs has
no current intention of modifying or discontinuing such limitation but may do so
in the future at its discretion. 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 A Shares pay a transfer
agency fee equal to $12,000 per year plus $7.50 per account together with out-
of-pocket and transaction related expenses.
Class B Shares of the Funds are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. Class B Shares bear the
cost of distribution (Rule 12b-1) fees at the aggregate rate of up to 0.75% of
the average daily net assets attributable to Class B Shares. Class B Shares
also bear the cost of an Authorized Dealer Service Plan at an annual rate of up
to 0.25% of the average daily net assets attributable to Class B Shares.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares and Class B
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.
B-52
<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 relevant 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 April 15, 1997, [insert name, address, 5% or more holder and Fund
name] outstanding shares.
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 directors from the separate voting requirements of Rule 18f-
2.
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. The 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 and CORE Lareg Cap Growth Fund,
Growth Fund and EMergind Markets Fund intends to elect and each other Fund has
elected to be treated, and intends to continue to qualify for each taxable year
as a regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income 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 annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities; (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign currencies); and
(iii) foreign currencies and foreign currency options, futures and forward
contracts that are not directly related to the Fund's principal business of
investing in stocks or securities or options and futures with respect to 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
B-53
<PAGE>
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 such entities that earn fee
income, rental income or other nonqualifying income. In addition, future
Treasury 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 accordance 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 and 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 at least
annually to its shareholders all or substantially all of its investment company
taxable income and net capital gain. 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 Asia Growth
Fund or International Fund 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 fails to distribute at least 90% of its investment
company taxable income or otherwise 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.
B-54
<PAGE>
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 did not pay
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 treated
as if they were paid by the Fund and received by such shareholders 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 net capital gains, if any, during
the eight years following the year of the loss. [insert name of funds that have
capital loss carry forwards] 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.
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 applicable 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, a 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 the
applicable Fund's distributions to shareholders.The short-short test described
above may limit a Fund's ability to use options, futures and forward
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 derivatives such as interest rate or
currency 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.
A Fund's investments in zero coupon securities or other securities bearing
original issue discount or, if the Fund elects to include market discount in
income currently, market discount, will generally cause
B-55
<PAGE>
it to realize income prior to the receipt of cash payments with respect to these
securities. The mark to market rules applicable to certain options, futures and
forward contracts, as described above, may also require that income or gain be
recognized without a concurrent receipt of cash. In order 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.
Each Fund (other than CORE U.S. Equity Fund) anticipates that it will be
subject to foreign taxes on its income (possibly including, in some cases,
capital gains) from certain 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 International Fund, Asia Growth Fund and Emerging Markets Fund,
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 applicable 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 International Fund, Asia Growth Fund and Emerging Markets Fund make
this election, which is not currently anticipated, their 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
the International Fund, Asia Growth Fund and Emerging Markets 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 Asia Growth Fund or
International 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 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 International Fund, Asia Growth Fund and Emerging Markets Fund
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 Funds.
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 International Fund, Asia Growth Fund and Emerging Markets
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 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 its investment company taxable income.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as inherent in a convertible bond) in certain non-U.S.
corporations that receive at least 75% of their annual
B-56
<PAGE>
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 such 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 be able to pass
through to its shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election would require the Fund to recognize taxable income or gain without
the 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 will be eligible,
subject to certain holding period and debt-financing restrictions, for the 70%
dividends received deduction for corporations. 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 International Fund, Asia
Growth Fund and Emerging Markets Fund 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, as computed for
federal income tax purposes, will first reduce a shareholder's tax basis in his
or her shares and, after such basis is reduced to zero, will constitute capital
gains to a shareholder who holds his or her 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
B-57
<PAGE>
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
U.S. SHAREHOLDERS - SALE OF SHARES
==================================
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise (except
as described in the next sentence) short-term. If, however, 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. 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. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
Shareholders who, as to the United States, 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. 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 the 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 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 Asia Growth
Fund or International Fund to treat qualified foreign taxes it pays as passed
through to shareholders (as described above), but they may not be able to claim
a U.S. tax credit or deduction with respect to such taxes.
Any gain realized by a 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
B-58
<PAGE>
other conditions are met. Non-U.S. investors should consult their tax advisers
about the applicability of U.S. federal income or withholding taxes to certain
distributions received by them.
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.
It is anticipated that each series of the Trust will be reorganized on
April 30, 1997, or as soon thereafter as practicable, into newly established
series of a Delaware business trust (the "Delaware Trust"). The initial
shareholder of the CORE Large Cap Growth Fund, Growth Fund and Emerging Markets
Fund has approved (i) the reorganization of the Trust into the Delaware Trust
and any and all matters incidental thereto, including the election of Trustees
of the Delaware Trust, (ii) an Investment Agreement between the Advisers and the
Delaware Trust on behalf of such Trust's series corresponding to the Fund, and
(iii) distribution and authorized dealer service plans with respect to such
series' Class A and Class B Shares and a service plan with respect to such
series' Service Shares, and has ratified the selection of the Delaware Trust's
independent public accountants. In the event that the shareholders of the other
Funds of the Trust do not approve the reorganization, the CORE Large Cap Growth
Fund, Growth Fund and Emerging Markets Fund may not be reorganized into the
Delaware Trust.
SHAREHOLDER AND TRUSTEE LIABILITY
=================================
DELAWARE TRUST. Under Delaware Law, the shareholders of the Delaware Trust
--------------
are not generally subject to liability for the debts or obligations of the
Delaware Trust. Similarly, Delaware Law provides that a series of the Delaware
Trust will not be liable for the debts or obligations of any other series of the
Delaware 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 proposed Declaration of Trust of the
Delaware Trust contains an express disclaimer of shareholder liability for acts
or obligations of a series. 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 of the Delaware Trust provides for
indemnification by the relevant series for all loss suffered by a
shareholder
B-59
<PAGE>
as a result of an obligation of the series. The Declaration of Trust of the
Delaware 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 of the Delaware 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.
The Declaration of Trust of the Delaware 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 Trustees 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.
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 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 the 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-60
<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 company 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 Directors to consider changing a Fund's
method of operations or providing alternative means of offering Service
B-61
<PAGE>
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 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.
B-62
<PAGE>
Appendix A
DESCRIPTION OF BOND RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
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.
- ----------
/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 the
Fund's fiscal year end.
1-A
<PAGE>
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 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 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 very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarding 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 predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. 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 is the highest rating within the speculative grade category.
2-A
<PAGE>
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.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
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 assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-one offices around the world, Goldman Sachs employs over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. The number one lead manager of U.S. common stock offerings for the
past six years (1989-1994) with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking excludes REITs, Trusts, Rights
====================================
and closed-end Fund offerings
2-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
3-B
<PAGE>
Appendix C
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.
1-C
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS BALANCED FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS GROWTH FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SMALL CAP EQUITY FUND
GOLDMAN SACHS ASIA GROWTH FUND
GOLDMAN SACHS EMERGING MARKETS FUND
(PORTFOLIOS OF GOLDMAN SACHS EQUITY FUNDS)
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 Class A Shares and Class B Shares of Goldman Sachs
Balanced Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE U.S.
Equity Fund, Goldman Sachs Growth and Income Fund, Goldman Sachs Capital Growth
Fund, Goldman Sachs Growth Fund, Goldman Sachs International Equity Fund,
Goldman Sachs Small Cap Equity Fund, Goldman Sachs Asia Growth Fund and Goldman
Sachs Emerging Markets Equity Fund dated May 1, 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>
Page
====
<S> <C>
Introduction.........................................
Investment Policies..................................
Investment Restrictions..............................
Management...........................................
Distribution and Authorized Dealer Service Plans.....
Portfolio Transactions and Brokerage.................
Net Asset Value......................................
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends.............................
Performance Information..............................
Shares of the Trust..................................
Taxation.............................................
Financial Statements.................................
Other Information....................................
Appendix A:..........................................
Appendix B:..........................................
Appendix C:..........................................
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS FUNDS MANAGEMENT, L.P. GOLDMAN, SACHS & CO.
Adviser to: Distributor
Goldman Sachs CORE U.S. Equity Fund 85 Broad Street
Goldman Sachs Capital Growth Fund New York, New York 10004
One New York Plaza
New York, New York 10004
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
Adviser to: MANAGEMENT INTERNATIONAL
Goldman Sachs Balanced Fund Adviser to:
Goldman Sachs CORE Large Cap Growth Fund Goldman Sachs International
Equity Fund
Goldman Sachs Growth and Income Fund Goldman Sachs Asia Growth Fund
Goldman Sachs Growth Fund Goldman Sachs Emerging Markets
Equity
Goldman Sachs Small Cap Equity Fund Fund
One New York Plaza New York, New York 10004
140 Fleet Street
London, England EC4A 2BJ
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
Toll free.......800-526-7384
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INTRODUCTION
Goldman Sachs Trust (the "Trust") is an open-end, management investment
company currently offering, through this Additional Statement, Goldman Sachs
Balanced Fund ("Balanced Fund"), Goldman Sachs CORE Large Cap Growth Fund ("CORE
Large Cap Growth Fund"), Goldman Sachs CORE U.S. Equity Fund ("CORE U.S. Equity
Fund")(formerly known as "Goldman Sachs Select Equity Fund"), Goldman Sachs
Growth and Income Fund ("Growth and Income Fund"), Goldman Sachs Capital Growth
Fund ("Capital Growth Fund"), Goldman Sachs Growth Fund ("Growth Fund"), Goldman
Sachs International Equity Fund ("International Fund"), Goldman Sachs Small Cap
Equity Fund ("Small Cap Fund"),Goldman Sachs Asia Growth Fund ("Asia Growth
Fund") and Goldman Sachs Emerging Markets Equity Fund ("Emerging Markets Fund")
(collectively referred to herein as the "Funds").
The Trust was organized under the laws of the State of Maryland on September
27, 1989 and was reorganized as part of a Delaware business trust on May 1,
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
additional series may be added in the future from time to time. The CORE Large
Cap Growth, CORE U.S. Equity, Growth and Income, Growth, International, Asia
Growth and Emerging Markets Funds currently offer four classes of shares: Class
A Shares, Class B Shares, Institutional Shares and Service Shares. The
Balanced, Capital Growth and Small Cap Equity Funds currently offer two classes
of shares: Class A and Class B 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
Balanced, CORE Large Cap Growth, Growth and Income, Growth and Small Cap 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, Asia Growth and
Emerging Markets 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.
INVESTING IN EMERGING MARKETS, INCLUDING ASIA
=============================================
Asia Growth Fund and Emerging Markets Funds are intended for long-term
investors who can accept the risks associated with investing primarily in equity
and equity-related securities of Emerging Countries issuers (in the case fo
Emerging Markets Fund) 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. In addition, certain of Asia
Growth and Emerging Markets Fund's potential investment and management
techniques entail special risks. There can be no assurance that either Fund
will achieve its investment objective. GSAMI believes that Asia offers an
attractive investment environment and that new opportunities will continue to
emerge in the years ahead. Asia Growth Fund concentrates on companies that
GSAMI believes are taking full advantage of the region's growth and that have
the potential for long-term capital appreciation. See "Investment Objectives and
Policies" and "Risk Factors" in the Prospectus and "Emerging Country Securities"
in this Additional Statement.
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
their portfolio securities or to acquire or dispose of securities at the price
and time they wish to do so or in order to meet redemption requests.
Transaction costs, including brokerage commission 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
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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 Asia Growth and Emerging Markets 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 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.
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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 providing 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 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
Investment Adviser de-emphasizes interest rate anticipation by monitoring the
duration of the portfolio within a narrow range of the Investment 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, 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
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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 - 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 - 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 LARGE CAP GROWTH AND CORE U.S. EQUITY FUNDS
================================================
Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of CORE Large Cap Growth Fund and CORE U.S. Equity
Fund will be implemented to the extent it is consistent with maintaining the
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 annual gross
income be derived from the sale or other disposition of stocks or securities
(including options and futures contracts) held for less than three months.
Since normal settlement for equity securities is three trading days, 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 on the S&P/BARRA Growth Index
(in the case of CORE Large Cap Growth Fund) or the S&P 500 Index(in the case of
CORE U.S. Equity Fund) in order to keep a Fund's effective equity exposure close
to 100%. For example, 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 sophisticated
computerized rating system for evaluating equity securities according to a
variety of investment characteristics (or factors). The factors
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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 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,
such securities possess many different investment characteristics. By using a
variety of relevant factors to select securities, the Investment 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 Investment 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 FUND
==================
International 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 Fund's highly
focused investment approach. For a description of the risks of the International
Equity Fund's investments in Asia, see "Investing in 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 Fund's portfolio through a three-stage
investment process. Because International Fund is a long-term holder of stocks,
the portfolio managers adjust International 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 Investment Advisers
seek 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.
Within these industries the Investment Advisers seek 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
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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.
GSAM'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. See "Investment Policies" and "Advisory and Administrative
Services."
The members of GSAM and 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 Fund 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 Growth and Income Fund, Capital Growth Fund, Small Cap Fund, Emerging
Markets Fund and Balanced Fund 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 Capital Growth
Fund, Small Cap Fund, Growth and Income Fund, Emerging Markets Fund and Balanced
Fund may invest, 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 securities fluctuate in
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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 tax and accounting purposes which is
distributable to shareholders and which, because no cash is received at the time
of accrual, may require the liquidation of other portfolio securities to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
=====================================
The interest rates payable on certain securities in which Balanced 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 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
====================
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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 Large Cap Growth and
CORE U.S. 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 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.
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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 authorized 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 conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. 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.
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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 Large Cap
Growth and CORE U.S. 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
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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
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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
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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-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
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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 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,
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Realized Losses generally will be allocated pro rata among all
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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 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
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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. Balanced Fund 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.
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
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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 participations 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
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Each Fund may purchase and sell futures contracts. Each Fund, other than
CORE Large Cap Growth Fund and CORE U.S. Equity Fund, may also purchase and
write options on futures contracts. CORE Large Cap Growth Fund and CORE U.S.
Equity Fund may only purchase and sell futures contracts on the S&P/BARRA Growth
Index or S&P 500 Index, respectively. 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, except for CORE
Large Cap Growth Fund and CORE U.S. Equity Fund, related options transactions,
only for bona fide hedging purposes as defined below or for purposes of seeking
to increase total return
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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 Large Cap Growth
Fund and CORE U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) 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 in
order to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE Large Cap Growth Fund and CORE U.S. Equity
Fund) foreign currency rates that would adversely affect the dollar value of
such Fund's portfolio securities. Such futures contracts may (except in the
case of CORE Large Cap Growth and CORE U.S. Equity Funds) include contracts for
the future delivery of securities held by the Fund or securities with
characteristics similar to those of the Fund's portfolio securities. Similarly,
each Fund (other than CORE Large Cap Growth Fund and CORE U.S. Equity Fund) may
sell futures contracts on a currency in which its portfolio securities are
quoted or denominated or in one currency 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 Investment 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 Investment 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 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.
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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
(except for CORE Large Cap Growth Fund and CORE U.S. Equity Fund) 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 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
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futures contracts and (except for CORE Large Cap Growth Fund and CORE U.S.
Equity Fund) will engage in 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, 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,
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. In addition, it is not possible to hedge
fully or protect against currency fluctuations affecting the value of 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 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, although CORE Large Cap Growth
Fund and CORE U.S. Equity Fund have no present intention of doing so. 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, high grade debt securities with a value at least
equal to the exercise price of the put option. The purpose of writing such
options is to generate additional income 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, as permitted by applicable law, (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 may purchase put and call options on any
securities in which it may invest or options on any securities index based on
securities in which it may invest although Select Equity Fund has no present
intention of doing so. 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.
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<PAGE>
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.
YIELD CURVE OPTIONS. Balanced Fund, with respect 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, as permitted by
applicable law, 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
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<PAGE>
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.
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. 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
==================================
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<PAGE>
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
Investment Adviser for investment by the Fund. CORE U.S. Equity Fund has 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.
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 Fund, International Fund, Asia Growth Fund and
Emerging Markets Equity Fund 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
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<PAGE>
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 U.S. Equity Fund) 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 Large Cap Growth Fund and CORE U.S. Equity Fund) 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.
A Fund (other than CORE Large Cap Growth Fund and CORE U.S. Equity Fund) 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."
EMERGING COUNTRY SECURITIES
===========================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Growth and Income Fund, Growth
Fund, Capitial Growth Fund and Small Cap Equity Fund may enter into forward
foreign currency exchange contracts for hedging purposes. Balanced Fund,
International Fund, Asia Growth Fund and Emerging Markets Fund may enter into
forward foreign currency exchange contracts for hedging purposes and to seek to
increase total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and
B-25
<PAGE>
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 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 Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund 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 Fund, International Fund, Asia
Growth Fund and Emerging Markets Fund 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, as permitted by
applicable law, 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 Fund, International Fund, Asia Growth
Fund and Emerging Markets Fund forward contracts entered into to increase total
return. If the value of the securities placed in the segregated account
declines, additional cash or liquid securities 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
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<PAGE>
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.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS.Each Fund (except CORE
Large Cap Growth Fund and CORE U.S. Equity Fund) each 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 Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency with a pattern of correlation. In addition, Balanced
Fund, International Fund, Emerging Markets and Asia Growth Fund may purchase
call options on currency to seek to increase total return when the Adviser
anticipates that the currency will appreciate in value, but the securities
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.
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<PAGE>
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 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 Fund, International Fund, Asia Growth Fund and Emerging Markets Fund
may use options on currency to seek to increase total return. Balanced Fund,
International Fund, Asia Growth Fund and Emerging Markets Fund 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 Fund, International
Fund, Asia Growth Fund and Emerging Markets Fund may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Balanced Fund, International Fund, Asia Growth Fund
and Emerging Markets Fund 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 Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund would normally purchase call options to seek to increase total return in
anticipation of an increase in the market value of a currency. Balanced Fund,
International Fund, Asia Growth Fund and Emerging Markets 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 Balanced Fund, International Fund, Asia Growth Fund and Emerging
Markets Fund 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
B-28
<PAGE>
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.
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 Fund, International Fund, Asia Growth Fund and Emerging Markets
Fund may, with respect 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 Fund 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
B-29
<PAGE>
assets, as permitted by applicable law, the Funds and the Investment 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 Investment 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 Investment 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.
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
Investment 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, as permitted by applicable law, in an amount sufficient
to meet the purchase price. Alternatively, a Fund
B-30
<PAGE>
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.
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 Investment 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 Investment
Adviser or any of its affiliates acts as adviser, the advisory and
administration fees payable by the Fund to an Investment 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 Investment 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 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.
B-31
<PAGE>
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.
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 Funds. 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 each Fund's 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 Fund's fundamental
investment restriction no. 1, asset coverage of at least 300% (as defined in the
Act), inclusive of any amounts borrowed, must be maintained at all times.
The Company may not on behalf of any Fund:
(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 (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 additional 5% of its total assets for temporary
purposes, (c) the Fund may obtain such short-term credits as may
be necessary
B-32
<PAGE>
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.
(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) Invest in companies for the purpose of excercising 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 borrowing exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) Make short sales of securities, except short sales against the box.
B-33
<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
New York, NY 10019 Financial Officer, Coty Inc. (since
April 1996); President, ABN Associates
(since June 1994) Retired. 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
One New York Plaza 1996); General Partner, Goldman Sachs
New York, NY 10004 (1986-1996); Co-Head of Goldman Sachs
Asset Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since May
One New York Plaza 1996); & President President, MFS
New York, NY 10004 Retirement Services Inc., of
Massachusetts Financial Services (prior
thereto).
John P. McNulty, 44 Trustee Managing Director, Goldman Sachs (since
New York Plaza 1996); One General Partner of Goldman
New York, NY 10004 Sachs (1990-1994 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
Taylor Hall 1978); Director of Bryn Mawr College
Bryn Mawr, PA 19010 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, 48 Trustee Limited Partner, Goldman Sachs (since
One New York Plaza 1994); Director and Vice President of
New York, NY 10004 Goldman Sachs Funds Management Inc.
(from April 1990 to November 1994);
President and Chief Operating Officer,
GSAM (from September 1988 to November
1994).
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One Northfield Plaza # 218 First Commonwealth, Inc. (a
Northfield, IL 60093 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),
First Commonwealth, Inc.
(since 1988), and North
American Private 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, (February 1987 to
June 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
70 West Madison St. Ste 1400 Partners, Inc. (since 1990);
Chicago, IL 60602 President and Chief Executive
Officer, Microdot, Inc. (a
diversified manufacturer of
fastening systems and
connectors)(January 1984 to
October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds
One New York Plaza Administration, Goldman Sachs
New York, NY 10004 Asset Management (since April
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,
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
(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).
</TABLE>
B-35
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL 60606 Shareholder Servicing of GSAM
since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Manage-
New York, NY ment (since February 1994);
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
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May
1994 respectively); Counsel to
the Funds Group, Goldman Sachs
Asset Management (since
November 1993); Associate of
Shereff Friedman, Hoffman &
Goodman (prior thereto).
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since January
New York, NY 10004 1994. Formerly at Cleary
Gottlieb, Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset
Management (since 1993); Funds
Trading Assistant, GSAM (1993-
1995); Compliance Analyst,
Prudential Insurance (1991-
1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which GSAM or an affiliate thereof is the
investment adviser, administrator and/or distributor. As of April ___, 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-37
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
B-38
<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
Fund and Capital Growth Fund. GSAM, One New York Plaza, New York, New York, a
separate operating division of Goldman Sachs, serves as investment adviser to
Balanced Fund, CORE Large Cap Growth Fund, Growth and Income Fund and Small Cap
Fund. GSAMI, 140 Fleet Street, London, England, EC4A 2BJ acts as the Investment
Adviser to International Fund, Asia Growth Fund and Emerging Markets Fund. 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 Investment 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' 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 the Investment 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 in International Fund's, Asia Growth Fund's and
Emerging Markets Fund's portfolio among various currencies, Investment Advisers
will have access to the Global Asset Allocation
B-39
<PAGE>
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, Investment
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 the International Fund's
investment objective and criteria.
Each Fund's management agreement provides that the Investment Advisers may
render similar services to others as long as the services provided by the
Investment Advisers thereunder are not impaired thereby.
The CORE Large Cap Growth Fund and Growth Fund management agreement was
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
January 28, 1997. These arrangements were most recently approved by the
shareholders of each Fund (other than CORE Large Cap Growth Fund, Growth Fund
and Emerging Markets Fund) on April 1, 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 Investment Adviser and by the Investment Adviser on 60
days' written notice to the Trust.
Pursuant to the management agreements the Investment Advisers are entitled
to receive the fees listed below, payable monthly of such Funds average daily
net assets. In addition, the Investment Advisers voluntarily agreed to limit
its management fee to an annual rate also listed below:
Management Management
With Fee without Fee
Fund Limitations Limitations
- ---- ------------- -----------
GSAM
Balanced Fund 0.65%
CORE Large Cap Growth Fund 1.00%
Growth and Income Fund 0.70%
Growth Fund
Small Cap Fund 1.00%
GSFM
CORE U.S. Equity Fund 0.75%
Capital Growth Fund
GSAMI
International Fund 1.00%
Asia Growth Fund 1.00%
Emerging Markets Fund ____%
B-40
<PAGE>
The Investment Advisers may discontinue or modify the above limitations in
the future at their discretion, although they have no current intention to do
so.
For the last three fiscal years the amounts of the advisory fees incurred
by each Fund then in existence were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== ====
<S> <C> <C> <C>
Balanced Fund /1/ $ $ 148,493 $ 6,814
CORE Large Cap Growth Fund/2/ N/A N/A N/A
CORE U.S. Equity Fund/5/ 578,721 62,255
Growth and Income Fund 1,748,649 621,416
Growth Fund/2/ N/A N/A N/A
Capital Growth Fund 7,001,809 6,543,621
International Fund/3,6/ 698,718 796,627
Small Cap 2,181,629 2,539,424
Asia Growth Fund/3,4/ 1,172,731 414,813
Emerging Markets Fund/2/ N/A N/A N/A
</TABLE>
- ----------------------------
1 Commenced operations on October 12, 1994.
2 Not Operational.
3 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 0.44%,
0.23% and 0.71%, respectively of CORE U.S. Equity, International and Asia
Growth Fund's average daily net assets.
4 Commenced operations on July 8, 1994.
5 Gives effect to the agreement (which was in effect as of June 15, 1995) by
GSFM to limit management fees to 0.44% of the CORE U.S. Equity Fund's
average daily net assets. For the fiscal years ended January 31, 1996 and
1997, had limitations not been in effect, CORE U.S. Equity Fund would have
paid $679,759 and $ _____, respectively, in investment management fees.
Pursuant to the management agreements, in addition to managing the
portfolio investments, the Investment Advisers responsibilities include, subject
to the general supervision of the Trustees, (a) providing supervision of all
aspects of the Trust's non-investment operations (the parties giving due
recognition to the fact that certain of such operations are performed by others
pursuant to agreements with each Fund), (b) providing the Trust, to the extent
not provided pursuant to its custodian and transfer agency agreements 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 Trust, (c) arranging, to the extent not provided
pursuant to such agreements, for the preparation, at the Trust's expense, of its
tax returns, reports to shareholders, periodic updating of the prospectuses and
reports filed with the SEC and other regulatory authorities, (d) providing the
Trust, 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 Trust's records other than those maintained pursuant to
such agreements.
B-41
<PAGE>
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 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.
B-42
<PAGE>
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 departmetns 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.
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
B-43
<PAGE>
of an entity, the Investment 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 the Balanced Fund, CORE U.S. Equity Fund, Growth and
Income Fund, Capital Growth Fund, International Fund, Small Cap Equity Fund, and
Asia Growth Fund; Emerging Markets Fund, CORE Large Cap Growth Fund and Growth
Fund, dated February 1, 1993, as amended as of January 30, 1996, January 28,
1997 and April 23, 1997, respectively. 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 and Class B 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 Shares, of such Fund
shares. No Class B Shares were outstanding during the fiscal years ended
January 31, 1995 and 1996.
Goldman Sachs retained the following commissions on sales of Class A Shares
during the following periods:
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== ====
<S> <C> <C> <C>
Balanced Fund/1/ $ $ 28,000 $ 14,000
CORE Large Cap Growth Fund/3/ N/A N/A N/A
CORE U.S. Equity Fund 108,000 58,000
Growth and Income Fund 771,000 361,000
Growth Fund/3/ N/A N/A N/A
Capital Growth Fund 523,000 815,000
International Fund 211,000 660,000
Small Cap Fund 202,000 868,000
Asia Growth Fund/2/ 507,000 829,000
Emerging Markets Fund/3/ N/A N/A N/A
</TABLE>
- ------------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
3 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, Goldman Sachs is entitled to receive a
B-44
<PAGE>
fee with respect to each Fund with respect to Class A Shares and Class B Shares
equal to $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 agents).
For the last three fiscal years the amounts paid to Goldman Sachs by each
Fund's Class A shares then in existence for transfer agency services performed
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== ====
<S> <C> <C> <C>
Balanced Fund/1/ $ $ 72,067 $ 20,000
CORE Large Cap Growth Fund/3/ N/A N/A N/A
CORE U.S. Equity Fund 103,682 151,230
Growth and Income Fund 524,671 262,158
Growth Fund/3/ N/A N/A N/A
Capital Growth Fund 549,844 694,014
International Fund 129,313 481,169
Small Cap Fund 254,292 600,618
Asia Growth Fund/2/ 192,097 120,000
Emerging Markets Fund/3/ N/A N/A N/A
</TABLE>
- -------------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
3 Not operational.
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.
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust with
respect to 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 Plan" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 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 A Plans,
cast in person at a meeting called for the purpose of approving the Class A
Plans. The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets.
Currently, Goldman Sachs has voluntarily agreed to waive the entire amount
of such fee for the Balanced Fund, CORE Large Cap U.S. Growth Fund, Growth and
Income Fund, Capital Growth Fund and Small Cap Equity Fund and to limit the
amount of such fee to 0.21% of average daily net assets attributable to Class A
Shares of CORE U.S. Equity Fund, International Fund, Asia Growth Fund and
Emerging Markets Funds. Goldman Sachs has no current intention of modifying or
discontinuing its fee waiver for the other Funds but may do so in the future at
its discretion.
B-45
<PAGE>
Each Class A Plan was amended effective June 1, 1995 for each of the Funds
then in existence to reduce the fee payable under the Plan from 0.50% of average
daily net assets attributable to Class A Shares. At the time of such amendment
the Trustees approved the Authorized Dealer Service Plan pursuant to which
personal and account maintenance services are provided. See "Management --
Authorized Dealer Service Plans."
For the fiscal year ended January 31, 1997 the amounts paid to Goldman
Sachs pursuant to its Class A Plan by each Fund then in existence were as
follows:
1997
====
Balanced Fund $
CORE Large Cap U.S. Growth Fund/1/ N/A
CORE U.S. Equity Fund
Growth and Income Fund
Growth Fund/1/ N/A
Capital Growth Fund
International Fund
Small Cap Fund
Asia Growth Fund
Emerging Markets Fund/1/ N/A
________________________________
1 Not operational.
Prior to June 1, 1995, Goldman Sachs limited its fees under each then in
existence Fund's Distribution Plan to 0.25% of the Fund's average daily net
assets. After June 1, 1995, Goldman Sachs waived the entire amount of such fees
for the Balanced Fund, Growth and Income Fund, Capital Growth Fund and Small Cap
Equity Fund. Had Goldman Sachs' voluntary limitations not been in effect the
Funds would have paid Goldman Sachs the following fees during the fiscal year
ended 1997 pursuant to their respective Distribution Plans:
1997
====
Balanced Fund $
CORE Large Cap U.S. Growth Fund/1/ N/A
CORE U.S. Equity Fund
Growth and Income Fund
Growth Fund/1/ N/A
Capital Growth Fund
International Fund
Small Cap Fund
Asia Growth Fund
Emerging Markets Fund/1/ N/A
________________________________
1 Not operational.
B-46
<PAGE>
During the fiscal year ended January 31, 1997, Goldman Sachs incurred the
following expenses in connection with distribution and personal and account
maintenance services under the Class A Plan of each Fund then in existence:
<TABLE>
<CAPTION>
Compensation Printing and Preparation
and Expenses Allocable Mailing of and
of the Overhead, Prospectuses Distribution
Distributor Telephone to Other of Sales
Compensation & Its Sales and Travel Than Current Literature and
To Dealers Personnel Expenses Shareholders Advertising
============ ============ ========== ============ ==============
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended
January 31, 1997:
Balanced Fund(1) $ $ $ $ $
CORE Large Cap U.S.
Growth Fund (2)
CORE U.S.
Equity Fund
Growth and
Income Fund(1)
Growth Fund(2)
Capital Growth Fund(1)
International Fund(1)
Small Cap Fund(1)
Asia Growth Fund(1)
Emerging Markets Fund (2)
</TABLE>
The table above reflects amounts expended by Goldman Sachs, which amounts are in
excess of the compensation received by Goldman Sachs under the Class A Plans.
The payments under the Class A Plans were used by Goldman Sachs to compensate it
for the expenses shown above on a pro-rata basis.
(1) EXPENSES REFLECTED ABOVE FOR THESE FUNDS WERE INCURRED THROUGH 5/31/95; AT
THIS POINT EXPENSES INCURRED EXCEEDED ANY REVENUES EARNED. FROM JUNE 1,
1995 THROUGH JANUARY 31, 1996 GOLDMAN SACHS DID NOT IMPOSE THE 0.25% 12B-1
FEE; THEREFORE, ADDITIONAL EXPENSES INCURRED HAVE NOT BEEN REFLECTED SINCE
REVENUE WAS NOT EARNED AFTER THE PERIOD PRESENTED.
(2) NOT OPERATIONAL.
B-47
<PAGE>
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 such fee exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements. If the Plans were terminated by the Trustees and no successor
plans were adopted, each Fund would cease to make payments to Goldman Sachs
under the Distribution Plans and Goldman Sachs would be unable to recover the
amount of any of its unreimbursed distribution expenditures.
Under the Plans, Goldman Sachs, as distributor of each Fund's Class A
shares, will provide to the Trustees for their review, and the Trustees will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Plans and the purposes for which such
services were performed and expenditures were made.
The Class A Plans will remain in effect until June 1, 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 Class A Plan.
A Class A Plan may not be amended to increase materially the amount to be spent
for the services described therein as to a Fund without approval of a majority
of the outstanding voting securities of the affected Fund. All material
amendments of the Class A Plan must also be approved by the Trustees in the
manner described above. A Class A Plan may be terminated at any time as to any
Fund without payment of any penalty by a vote of a majority of the non-
interested Trustees or by vote of a majority of the Class A Shares of the
applicable Fund. So long as the Class A 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 Distribution Plan will
benefit the Funds and their Class A shareholders.
The Plans for Capital Growth Fund and CORE U.S. Equity Fund were most
recently approved by shareholders at a meeting held on November 27, 1991. The
Plans for each of Small Cap Fund, International Fund, Growth and Income Fund,
Asia Growth Fund, Balanced Fund and Emerging Markets Fund were approved by its
sole initial shareholder on September 16, 1992, October 23, 1992, January 29,
1993, June 1, 1994, October 4, 1994, and __________, 1997, respectively. The
Plans for each of CORE Large Cap Growth Fund and Growth Fund were approved by
its sole initial shareholder on _______, 1997.
CLASS B DISTRIBUTION PLANS. As described in the Prospectus, the Trust has
adopted on behalf of the Funds' distribution plans (the "Class B Plans")
pursuant to Rule 12b-1 under the Act with respect to the Class B shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plan of Emerging Markets Fund was initially approved on January
28, 1997 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 B Plan, cast in person at a meeting called for the purpose of approving
the Class B Plan. The Class B Plans were most recently approved for the Funds
(except Emerging Markets Fund) on April 26, 1996 and for the Emerging Markets
Fund on January 28, 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 B Plans, cast in person at a meeting
called for the purpose of approving the Class B Plans. The Class B Plan of
Emerging Markets Fund was initially approved by the sole initial shareholder of
the Class B shares on ________, 1997. The Class B Plans for the Funds (except
Emerging Markets Fund) were approved by the sole initial shareholders of the
Class B Shares of the Funds on January 30, 1996 and on April 23, 1997 for the
Emerging Markets Fund.
B-48
<PAGE>
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
No fees were paid to Goldman Sachs under the Class B Plans during the
fiscal year ended January 31, 1997.
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 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 B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the 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 until June 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 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 Trustees 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.
AUTHORIZED DEALER SERVICE PLANS. As described in the prospectus, each
Fund's Class A and Class B Shares has adopted a non-Rule 12b-1 Authorized Dealer
Service Plan (each a "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for the provision of personal and account
maintenance services. The Service Plan of Emerging Markets Fund was initially
approved on January 28, 1997 and the Service Plan of CORE Large Cap Growth Fund
and Growth Fund was initially approved on April 23, 1997 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 Plan. Each Service Plan of
each other Fund was most recently approved by the Trustees, including a majority
of the non-interested Trustees who have no direct or indirect financial interest
in the Service Plan, at a meeting held on April 23, 1997. Each Fund's Service
Plan provides for the compensation for personal and account maintenance services
at an annual rate of up to 0.25% of the Fund's average daily net assets
attributable to Class A or Class B shares.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
(commencement of each Service Plan) through January 31, 1996, each Fund paid
Authorized Dealer Service fees at the
B-49
<PAGE>
foregoing rate for each Fund's Class A shares. During the fiscal year ended
January 31, 1997 and for the period June 1, 1995 (commencement of each Service
Plan) through January 31, 1996, and no Authorized Dealer Service fees were paid
with respect to any Fund's Class B shares.
For the fiscal year ended January 31, 1997 and for the period June 1, 1995
through January 31, 1996, the amounts paid to Goldman Sachs pursuant to its
Class A Authorized Dealer Service Plan was:
<TABLE>
<CAPTION>
1997 1996
==== ====
<S> <C> <C>
Balanced Fund $ $ 64,145
CORE Large Cap U.S. Growth Fund/1/ N/A N/A
CORE U.S. Equity Fund 182,881
Growth and Income Fund 603,426
Growth Fund/1/ N/A N/A
Capital Growth Fund 1,563,448
International Fund 470,027
Small Cap Fund 454,857
Asia Growth Fund 276,754
Emerging Markets Equity Fund/1/ N/A N/A
</TABLE>
- ------------------------
1 Not operational.
The Service Plans of each Fund will remain in effect until June 1, 1998,
and from year to year thereafter, provided that the continuance of each service
plan 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. All material amendments of the Service Plans
must also be approved by the Trustees in the manner described above. The
Service Plans may be terminated at any time as to any Fund without payment of
any penalty by a vote of a majority of the non-interested Trustees or by vote of
a majority of the outstanding voting securities of the affected Fund. The
Trustees have determined that in their judgment there is a reasonable likelihood
that the Service Plans will benefit the Funds and their shareholders.
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 payable to GSAM, 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
B-50
<PAGE>
"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 Investment Advisers have voluntarily agreed to reduce or limit certain
"Other Expenses" of the CORE Large Cap Growth Fund, Balanced Fund, CORE U.S.
Equity Fund, Growth and Income Fund, Growth, Capital Growth Fund, International
Fund, Small Cap Equity Fund, Asia Growth Fund and Emerging Markets Fund
(excluding management, distribution and authorized dealer service fees, any
class-specific transfer agency fees, taxes, interest and brokerage fees and
litigation, indemnification and other extraordinary expenses) to the extent such
expenses exceed 0.10% of the average daily net assets of Balanced Fund, ___% of
the average daily net assets of CORE Large Cap Growth Fund, 0.06% of the average
daily net assets of Core U.S. Equity Fund, 0.11% of the average daily net assets
of Growth and Income Fund, ___% of the average daily net assets of Capital
Growth Fund, 0.24% of the average daily net assets of International Fund, ___%
of the average daily net assets of Small Cap Fund, 0.24% of the average daily
net assets of Asia Growth Fund and ___% of the average daily net assets of
Emerging Markets Fund. Such reductions or limits, if any, are calculated monthly
on a cumulative basis and, although it has no current intention to do so, may be
discontinued or modified by the Adviser at 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:
<TABLE>
<CAPTION>
1997 1996 1995
==== ==== ====
<S> <C> <C> <C>
Balanced Fund/1/ $ $192,405 $ 95,906
CORE Large Cap U.S. Growth Fund/3/ N/A N/A N/A
CORE U.S. Equity Fund 110,581 N/A
Growth and Income Fund 0 106,725
Growth Fund/3/ N/A N/A N/A
Capital Growth Fund N/A N/A N/A
International Fund N/A N/A N/A
Small Cap Fund N/A N/A N/A
Asia Growth Fund/2/ 0 35,905
Emerging Markets Fund3 N/A N/A N/A
</TABLE>
- ---------------------
1 Commenced operations on October 12, 1994.
2 Commenced operations on July 8, 1994.
3 Not operational.
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.
B-51
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
==============================
_____________________, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, _____________________ 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 Investment 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. A Fund will not deal with Goldman Sachs in
any transaction in which Goldman Sachs acts as principal.
In placing orders for portfolio securities of a Fund, the Investment
Advisers are generally required to give primary consideration to obtaining the
most favorable price and efficient execution under the circumstances. This
means that an Investment Adviser will seek to execute each transaction at a
price and commission, if any, which provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. While the Investment
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 Investment Advisers will consider
research and investment services provided by brokers or dealers who effect or
are parties to portfolio transactions of a Fund, the Investment 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 statistical and economic data and research reports on particular
companies and industries. Such services are used by the Investment 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 Investment Advisers in
providing management services for the Trust. In addition, the Investment
Advisers are authorized to take into account sales of shares of the Funds and
other funds in the Goldman Sachs Group of Funds in allocating purchase and sale
orders of portfolio securities provided that the Investment Advisers believe
that the quality of the transaction and commissions comparable to other
qualified firms.
On occasions when an Investment 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 Investment Adviser acts as investment adviser or subadviser), the
Investment 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.
B-52
<PAGE>
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 Investment
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 Investment 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 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.
In addition, Goldman Sachs, as a member firm of the New York Stock Exchange
may effect exchange transactions and receive compensation therefor if expressly
so authorized in a written contract with the Trust. The Trust, on behalf of
each Fund, has entered into such a contract with Goldman Sachs. Goldman Sachs
will provide the Trust at least annually with a statement setting forth the
total amount of all compensation retained by Goldman Sachs in connection with
effecting transactions for the accounts of the Funds. The Trustees will review
and approve all the Funds' portfolio transactions with Goldman Sachs and the
compensation received by Goldman Sachs in connection therewith. The Trust, of
course, will effect its portfolio transactions in a manner consistent with all
applicable laws.
B-53
<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/(1)/
CORE Large Cap Growth Fund /(8)/ N/A N/A N/A N/A
CORE U.S. Equity Fund
Growth and Income
Fund
Growth Fund /(8)/ N/A N/A N/A N/A
Capital Growth Fund
International Fund
Small Cap Fund
Asia Growth Fund/(4)/
Emerging Markets Fund/(8)/ N/A N/A N/A N/A
</TABLE>
B-54
<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/(1)/
CORE Large Cap Growth Fund /(8)/ N/A N/A N/A N/A
CORE U.S. Equity Fund
Growth and Income
Fund
Growth Fund /(8)/ N/A N/A N/A N/A
Capital Growth Fund
International Fund
Small Cap Fund
Asia Growth Fund/(4)/
Emerging Markets Fund/(8)/ N/A N/A N/A N/A
</TABLE>
B-55
<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/(1)/
CORE Large Cap Growth Fund /(8)/ N/A N/A N/A N/A
CORE U.S. Equity Fund
Growth and Income
Fund
Growth Fund /(8)/ N/A N/A N/A N/A
Capital Growth Fund
International Fund
Small Cap Fund
Asia Growth Fund/(4)/
Emerging Markets Equity Fund/(8)/ N/A N/A N/A N/A
</TABLE>
B-56
<PAGE>
- ----------------------------
1 Balanced Fund commenced operations on October 12, 1994.
2 Percentage of total commissions paid.
3 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
4 Asia Growth Fund commenced operations on July 8, 1994.
5 Growth and Income Fund commenced operations on February 5, 1993.
6 Small Cap Fund commenced operations on October 22, 1992.
7 International Fund commenced operations on December 1, 1992.
8 Not operational.
B-57
<PAGE>
During the fiscal year ended January 31, 1997, the Trust acquired and sold
securities of its regular broker-dealers: [insert broker/dealer names]. 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): [insert fund names, broker-dealer name and dollar amounts].
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 Nasdaq National Market ("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)
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 price; (c) exchange traded options and futures contracts will be
valued at the last sale price in the market where such contracts are principally
traded; (d) 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; (e) debt securities, other than money market instruments, will be
valued on the basis of dealer-supplied quotations or by using a pricing service
approved by the Trustees if such prices are believed by the Adviser to
accurately represent market value; money market instruments, which are defined
as those debt securities with a remaining maturity of 60 days or less, will be
valued at amortized cost; (f) overnight repurchase agreements will be valued at
cost and term repurchase agreements will be valued at the average of bid
quotations obtained daily from at least two recognized dealers; (g) OTC and
exchange traded options will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank;
and (h) all other securities, including those for which a pricing service
supplies no quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate, will be valued at fair value in accordance with
procedures established by the Trustees.
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
B-58
<PAGE>
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 (as
defined herein under "Shares of the Trust") established by 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 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.
OTHER INFORMATION REGARDING PURCHASES, REDEMPTIONS,
EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
RIGHT OF ACCUMULATION (CLASS A)
===============================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A shares (acquired by purchase or exchange) of the
Funds and Class A shares of any other Goldman Sachs Portfolio (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $35,000 and
purchases additional Class A shares of any Fund with a purchase price of
$25,000, the sales charge for the $25,000 purchase would be 4.75% (the rate
applicable to a single purchase of more than $60,000). Class A shares purchased
without the imposition of a sales charge may not be aggregated with Class A
shares purchased subject to a sales charge. Class A shares of the Funds and any
other Goldman Sachs Portfolio purchased (i) by an individual, his spouse and his
minor children, and (ii) by a trustee, guardian or other fiduciary of a single
trust estate or a single fiduciary account, will be combined for the purpose of
determining whether a purchase will qualify for such right of accumulation and,
if qualifying, the applicable sales charge level. For purposes of applying the
B-59
<PAGE>
right of accumulation, shares of the Funds and any other Goldman Sachs Portfolio
purchased by an existing client of the Private Client Services Division of
Goldman Sachs will be combined with Class A shares held by any other account
over which such client or the client's spouse exercises investment or voting
power. In addition, Class A shares of the Funds and Class A shares of any other
Goldman Sachs Portfolio purchased by partners, directors, officers or employees
of the same business organization or by groups of individuals represented by and
investing on the recommendation of the same accounting firm or other similar
organization (collectively, "eligible persons") may be combined for the purpose
of determining whether a purchase will qualify for the right of accumulation
and, if qualifying, the applicable sales charge level. This right of
accumulation is subject to the following conditions: (i) the business
organization's or firm's agreement to cooperate in the offering of the Funds'
shares to eligible persons; and (ii) notification to the Funds at the time of
purchase that the investor is eligible for this right of accumulation.
STATEMENT OF INTENTION (CLASS A)
================================
If a shareholder anticipates purchasing at least $50,000 of Class A shares
of a Fund alone or in combination with Class A shares of any other Goldman Sachs
Portfolio within a 13-month period, the shareholder may purchase shares of the
Fund at a reduced sales charge by submitting a Statement of Intention (the
"Statement"). Shares purchased pursuant to a Statement will be eligible for the
same sales charge discount that would have been available if all of the
purchases had been made at the same time. The shareholder or his Authorized
Dealer must inform Goldman Sachs that the Statement is in effect each time
shares are purchased. There is no obligation to purchase the full amount of
shares indicated in the Statement. A shareholder may include the value of all
Class A shares on which a sales charge has previously been paid as an
"accumulation credit" toward the completion of the Statement, but a price
readjustment will be made only on Class A shares purchased within ninety (90)
days before submitting the Statement. The Statement authorizes the Transfer
Agent to hold in escrow a sufficient number of shares which can be redeemed to
make up any difference in the sales charge on the amount actually invested. For
purposes of satisfying the amount specified on the Statement, the gross amount
of each investment, exclusive of any appreciation on shares previously
purchased, will be taken into account.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
A Fund shareholder should obtain and read the prospectus relating to any
other Fund, Goldman Sachs Portfolio or ILA Portfolio (as defined in the
Prospectus) and its shares or units and consider its investment objective,
policies and applicable fees before electing cross-reinvestment into that Fund
or Portfolio. The election to cross-reinvest dividends and capital gain
distributions will not affect the tax treatment of such dividends and
distributions, which will be treated as received by the shareholder and then
used to purchase shares of the acquired fund. Such reinvestment of dividends
and distributions in shares of other Goldman Sachs Portfolios or in units of ILA
Portfolios is available only in states where such reinvestment may legally be
made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Portfolio and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Portfolio.
B-60
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A or Class B shares would be disadvantageous because of the
sales charge imposed on purchases of Class A shares or the imposition of a CDSC
on redemptions of Class A and Class B shares. The CDSC applicable to Class B
shares redeemed under a systematic withdrawal plan may be waived. See "How to
Invest -- Waiver or Reduction of Continent 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.
DIVIDENDS
=========
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 a Fund's dividends may be treated as a return of capital,
nontaxable to the extent of a shareholder's tax basis in his shares. 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 realized during the current year.
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.
B-61
<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 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, Changing Times, Financial World, Forbes, Fortune, Money, 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 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,
B-62
<PAGE>
Salomon Brothers, Merrill Lynch, Donaldson Lufkin and Jenrette or other
providers of such data and (t) the FT-Actuaries Europe and Pacific Index. 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.
The CORE Large Cap Growth Fund and Growth Fund were organized on May 1,
1997 and have no operating or performance history prior thereto. However, in
accordance with interpretive positions expressed by the staff of the Securities
and Exchange Commission, the Funds have adopted the adjusted performance record
of a Separate Account for periods prior to the Funds' commencement of
operations. Any quotation of performance data of these Funds 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 has
been adjusted downward based on the expenses applicable to Class A Shares to
reflect the expenses expected to be incurred by the Funds 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 on and other operating expenses. Total return quotations will be
calculated pursuant to SEC approved methodology. Prior to [____________], each
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, Separate Account was not
registered as an investment company under the 1940 Act and therefore was not
subject to certain investment restrictions and operational requirements that are
imposed on investment companies by the 1940 Act. If the Separate Account had
been registered as an investment company under the 1940 Act, the Separate
Account's performance may have been adversely affected by such restrictions and
requirements. On [___________], Separate Account transferred a substantial
portion of its assets to the Fund in exchange for Fund shares. The performance
record of each other class has been linked to the 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-63
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== =======
<S> <C> <C> <C>
Capital ended
Growth
Fund-- 4/20/90* 1/31/97
Class A Shares
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
2/1/92 five years
ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-64
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
CORE U.S.
Equity Fund-- 5/24/91* ended
Class A Shares 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
2/1/96 ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
five year
2/1/92 ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
CORE U.S. Equity
Fund --
Institutional
Shares 6/15/95* ended
1/31/97
- -Assumes 5.5%
sales charge N/A
- -Assumes no
sales charge
</TABLE>
B-65
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
Small
Cap Fund-- 10/22/92* ended
Class A Shares 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-66
<PAGE>
VALUE OF $1,000 INVESTMENT(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
International
Fund-- 12/1/92* ended
Class A Shares 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-67
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
===== ========== ====== ======
<S> <C> <C> <C>
Growth
and Income ended
Fund-- 2/5/93* 1/31/97
Class A Shares
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
2/1/96 one year
ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-68
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ====== ======
<S> <C> <C> <C>
Asia Growth ended
Fund-- 7/8/94* 1/31/97
Class A Shares
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-69
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ========== ======
<S> <C> <C> <C>
Balanced ended
Fund-- 10/12/94* 1/31/97
Class A Shares
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-70
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ====== ======
<S> <C> <C> <C>
Capital ended
Growth
Fund 4/20/90* 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
five years
ended
2/1/92 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-71
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENT
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ====== ======
<S> <C> <C> <C>
CORE U.S.
Equity Fund 5/24/91* ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
2/1/96 ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
five years
2/1/92 ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
CORE U.S. Equity
Fund --
Institutional ended
Shares 6/15/96 1/31/97
- -Assumes 5.5%
sales charge N/A
- -Assumes no
sales charge
</TABLE>
B-72
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ====== ======
<S> <C> <C> <C>
Small
Cap Fund 10/22/92* ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-73
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
International
Fund 2/1/92* ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-74
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ========== ====== ======
<S> <C> <C> <C>
Growth
and Income ended
Fund 2/5/94* 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
2/1/96 one year
ended
1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-75
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
Asia Growth ended
Fund 7/8/94* 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
B-76
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
ASSUMING NO VOLUNTARY WAIVER OF FEES AND NO EXPENSE REIMBURSEMENTS
<TABLE>
<CAPTION>
Investment Investment Average
Fund Date Period Annual
==== ==== ====== ======
<S> <C> <C> <C>
Balanced ended
Fund 10/12/94* 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
one year
ended
2/1/96 1/31/97
- -Assumes 5.5%
sales charge
- -Assumes no
sales charge
</TABLE>
========================
* Commencement of Operations
** An aggregate total return (not annualized) is shown instead of an average
annual total return since the Institutional Class has not completed a full
twelve months of operations.
B-77
<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 Trust was established as a Maryland corporation by Articles of
Incorporation dated ____________ and reorganized as part of Goldman Sachs Trust,
a Delaware business turst, by a Declaration of Trust dated January 28, 1997.
Each of the Funds became a series of the Trust pursuant to a reorganization
which occurred 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. CORE Large Cap Growth Fund,
Growth Fund, CORE U.S. Equity Fund, Growth and Income Fund, International Fund,
Asia Growth Fund and Emerging Markets Fund have been classified into four
classes: Institutional Shares, Service Shares, Class A Shares and Class B
Shares. As of January 31, 1997, each other series of the Trust has Class A
Shares and Class B Shares outstanding.
Each Institutional Share, Service Share, Class A Share and Class B Share of
a Fund represents a proportionate interest in the assets belonging to 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
B-78
<PAGE>
Shares or Class B Shares and transfer agency fees are borne at different rates
by Class A Shares or Class B 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 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 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. Except for CORE U.S. Equity
Fund, International Fund, Emerging Markets Fund and Asia Growth Fund, Goldman
Sachs has voluntarily agreed to waive its entire distribution fee. Goldman
Sachs has no current intention of modifying or discontinuing such limitation but
may do so in the future at its discretion. 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.
It is possible that an institution or its affiliate may offer different
classes of shares (i.e., Institutional, Service, Class A Shares and Class B
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 relevant 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.
B-79
<PAGE>
As of April 15, 1997, [insert name, address, 5% or more holders, fund name
and outstanding shares, respectively.]
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.
SHAREHOLDER AND TRUSTEE LIABILITY
DELAWARE TRUST. Under Delaware Law, the shareholders of the Delaware Trust
--------------
are not generally subject to liability for the debts or obligations of the
Delaware Trust. Similarly, Delaware Law provides that a series of the Delaware
Trust will not be liable for the debts or obligations of any other series of the
Delaware 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 proposed Declaration of Trust of the
Delaware Trust contains an express disclaimer of shareholder liability for acts
or obligations of a series. 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 of the Delaware Trust provides for
indemnification by the relevant series for all loss suffered by a shareholder as
a result of an obligation of the series. The Declaration of Trust of the
Delaware 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 of the Delaware 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.
The Declaration of Trust of the Delaware 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 Trustees 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.
B-80
<PAGE>
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 Fund, Growth
Fund and Emerging Markets Fund each intends to elect and each other Fund has
elected to be treated and intends to continue to qualify for each taxable year
as a regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its annual gross
income 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 annual gross income from the sale or
other disposition of any of the following which was held for less than three
months: (i) stock or securities; (ii) options, futures or forward contracts
(other than options, futures or forward contracts on foreign currencies); and
(iii) foreign currencies and foreign currency options, futures and forward
contracts that are not directly related to the Fund's principal business of
investing in stocks or securities or options and futures with respect to stocks
or securities (the "short-short test"); and (c) such Fund diversify its holdings
so that, at the end 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 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
B-81
<PAGE>
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, 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 at least annually to its shareholders all or
substantially all of its investment company taxable income and net capital gain.
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 Asia Growth Fund or International Fund 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 fails to
distribute at least 90% of its investment company taxable income or otherwise
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 treated as
distributed by the Fund and 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. [insert name of Funds that have
capital loss carry forwards] 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.
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
B-82
<PAGE>
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.
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 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. In order 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.
Each Fund (other than CORE U.S. Equity Fund) 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 International Fund, Asia Growth Fund and Emerging Markets Fund and
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
will be required to (i) include in ordinary gross income (in addition to taxable
distributions 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 International Fund, Asia Growth Fund and Emerging Markets Fund make
this election, their 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 the International Fund,
Asia Growth Fund and Emerging Markets Fund, although such shareholders will be
required to include their shares of such taxes in gross income if the election
is made.
B-83
<PAGE>
If a shareholder chooses to take credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Asia Growth Fund or
International 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 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 International Fund, Asia Growth Fund and Emerging Markets Fund
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 International Fund, Asia Growth Fund and Emerging Markets
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 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 its investment company taxable income.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain non-U.S.
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rentals, royalties or capital gains) 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 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
B-84
<PAGE>
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 will be eligible,
subject to certain holding period and debt-financing restrictions, for the 70%
dividends received deduction for corporations. 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 International Fund, Asia
Growth Fund and Emerging Markets Fund 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 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.
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
==========================================
When a shareholder's shares are sold, redeemed or otherwise disposed of,
the shareholder will generally recognize gain or loss equal to the difference
between the shareholder's adjusted tax basis in the shares and the cash, or fair
market value of any property, received. Assuming the shareholder holds the
shares as a capital asset at the time of such sale or other disposition, such
gain or loss should be capital in character, and long-term if the shareholder
has a tax holding period for the shares of more than one year, otherwise (except
as described in the next sentence) short-term. If, however, 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 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
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<PAGE>
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. Any amounts withheld may be credited against a
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
=====================
Shareholders who, as to the United States, 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. 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 the 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 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 Asia Growth
Fund or International Fund to treat qualified foreign taxes it pays as passed
through to shareholders (as described above), but they may not be able to claim
a U.S. tax credit or deduction with respect to such taxes.
Any gain realized by a 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. investors
should consult their tax advisers about the applicability of U.S. federal income
or withholding taxes to certain distributions received by them.
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 different tax consequences
for shareholders than would direct investment in such Fund's portfolio
securities. Shareholders should consult their own tax advisers concerning these
matters.
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<PAGE>
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
Class A Shares of each Fund are sold at a maximum sales charge of 5.5%.
Using the initial offering price per share, as of January 31, 1997, the maximum
offering price of each Fund's Class A shares would be as follows:
<TABLE>
<CAPTION>
Maximum Offering
Net Asset Sales Price to
Value Charge Public
--------- ------- --------
<S> <C> <C> <C>
Balanced Fund $17.31 $1.01 $18.32
CORE Large Cap Growth Fund
CORE U.S. Equity Fund 19.66 1.14 20.80
Growth and Income Fund 19.98 1.16 21.14
Capital Growth Fund 14.91 0.87 15.78
Growth Fund
International Fund 17.20 1.00 18.20
Small Cap Fund 17.29 1.01 18.30
Asia Growth Fund 16.49 0.96 17.45
Emerging Markets Fund
</TABLE>
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 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
B-87
<PAGE>
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-88
<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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
- ----------------------------------------------------------------
* The rating 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.
1-A
<PAGE>
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 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.
2-A
<PAGE>
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
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 in accordance with the terms of the obligation. 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 is the highest rating within the speculative grade category.
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.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Unrated: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
3-A
<PAGE>
Appendix B
The Company may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (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 Company may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
1-B
<PAGE>
Appendix C
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-C
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms,
with assets exceeding $70 billion and partners capital and subordinated
liabilities of over $4.9 billion as of November 24, 1995.
. With thirty-three offices around the world, Goldman Sachs employs over
8,000 professionals focused on opportunities in major markets.
. An equity research budget of $126 million for 1996.
. The number one lead manager of U.S. common stock offerings for the
past six years (1989-1994) with 18% of the total dollar volume.*
* Source: Securities Data Corporation. Ranking excludes REITs, Trusts, Rights
====================================
and closed-end Fund offerings
2-C
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
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
3-C
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
ILA UNITS
Goldman Sachs Trust (the "Trust") is a no-load, open-end management
investment company (or mutual fund) which includes the Goldman Sachs--
Institutional Liquid Assets portfolios. This Statement of Additional
Information relates solely to the offering of ILA Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively
the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Portfolios' investment adviser. Goldman Sachs serves as distributor and
transfer agent to the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority
that Goldman Sachs places on serving clients' interests. As Goldman Sachs
clients, unitholders will be assigned an Account Administrator ("AA"), who is
ready to help unitholders with questions concerning their accounts. During
business hours, unitholders can call their AA through a toll-free number to
place purchase or redemption orders or to obtain Portfolio and account
information. The AA can also answer inquiries about rates of return and
portfolio composition/ holdings, and guide unitholders through operational
details. A Goldman Sachs client can also utilize the SMART/SM/ personal
<PAGE>
computer software system which allows unitholders to purchase and redeem units
and also obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus relating to ILA Units dated
May 1, 1997, as amended and supplemented from time to time, a copy of which may
be obtained without charge by calling Goldman, Sachs & Co. at 800-621-2550 or by
writing Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices
of the Portfolios.................... 4
Investment Limitations................. 43
Trustees and Officers.................. 47
The Adviser, Distributor and Transfer
Agent.................................. 53
Portfolio Transactions................. 57
Net Asset Value........................ 58
Redemptions............................ 60
Calculation of Yield Quotations........ 61
Tax Information........................ 64
Organization and Capitalization........ 71
Custodian and Subcustodian............. 76
Independent Accountants................ 76
Financial Statements................... 76
Appendix A (Description of Securities
Ratings)............................. A-1
</TABLE>
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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 ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government Securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
Each 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
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specific merchandise, which are "accepted" by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties
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 only
enter into repurchase agreements with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios' custodian
or subcustodian. The repurchase price may be higher than the purchase price,
the difference being income to the Portfolio, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Portfolio
together with the repurchase price on repurchase. In either case, the income to
the Portfolio is unrelated to the interest rate on the Obligation subject to the
repurchase agreement.
Repurchase agreements pose certain risks for all entities, including the
Portfolios, that utilize them. Such risks are not unique to the Portfolios but
are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by,
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among others, the means indicated below, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally for federal income tax purposes, a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation. It is not clear whether for other purposes a court would
consider the Obligation purchased by the Portfolio subject to a repurchase
agreement as being owned by the Portfolio or as being collateral for a loan by
the Portfolio to the seller.
If in the event of bankruptcy or insolvency proceedings against the seller
of the Obligation, a court holds that the Portfolio does not have a perfected
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Portfolio would be at risk of losing some
or all of the principal and income involved in the transaction. To minimize
this risk, the Portfolios utilize custodians and subcustodians that the Adviser
believes follow customary securities industry practice with respect to
repurchase agreements, and the Adviser analyzes the creditworthiness of the
obligor, in this case the seller of the Obligation. But because of the legal
uncertainties, this risk, like others associated with repurchase agreements,
cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, 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, the Portfolio (other than the Treasury Instruments Portfolio),
together with other registered investment companies having advisory agreements
with the Adviser or any of its affiliates, may transfer uninvested cash balances
into a
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single joint account, the daily aggregate balance of which will be invested in
one or more repurchase agreements.
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 valua
tion, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios may invest in asset-
backed and receivables-backed securities. Asset-backed and receivables-backed
securities represent participations in, or are secured by and payable from,
pools of assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, corporate
receivables and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit or a
pool insurance policy issued by a financial institution or other credit
enhancements may be present. The value of a Portfolio's investments in asset-
backed and receivables-backed securities may be adversely affected by prepayment
of the underlying obligations. In addition, the risk of prepayment may cause
the value of these investments to be more volatile than a Portfolio's other
investments.
Through the use of trusts and special purpose corporations, various types
of assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being
7
<PAGE>
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 these and other types of asset-backed
securities that may be developed in the future. This Statement of Additional
Information will be amended or supplemented as necessary to reflect the Prime
Obligations and Money Market Portfolios' intention to invest in asset-backed
securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, the Portfolios will
generally not invest in an asset-backed security if the income received with
respect to its investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-backed
securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
8
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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
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transactions or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
reflecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the value of or return on an investment in such a
security.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments could require
the Prime Obligations and Money Market Portfolios to dispose of any then
existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities at a future date.
The price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Portfolio will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions, distributions from
which would be taxable to its unitholders. For purposes of determining a
Portfolio's average dollar weighted maturity, the maturity of
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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 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
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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 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 in strument 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
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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 secu rities are liquid. The Board of Trustees
may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes, construction loan notes,
tax-exempt commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other 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
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repayment of the notes. Tax-exempt commercial paper consists of short-term
unsecured promissory notes issued by a state or local government or an authority
or agency thereof. The Portfolios which invest in municipal obligations may
also acquire securities in the form of custodial receipts which evidence
ownership of future interest payments, principal payments or both on certain
state and local governmental and authority obligations when, in the opinion of
bond counsel, interest payments with respect to such custodial receipts are
excluded from gross income for federal income tax purposes, and in the case of
the Tax-Exempt California and Tax-Exempt New York Portfolios, exempt from
California and New York (city and state) personal income taxes, respectively.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" ("MRs") and "Municipal Certificates of Accrual on Tax-
Exempt Securities" ("M-CATS"). There are a number of other types of notes
issued for different purposes and secured differently from those described
above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
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
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local authority for capital projects are secured by annual lease rental payments
from the state or locality to the authority sufficient to cover debt service on
the authority's obligations.
Private activity bonds (a term that includes certain types of bonds the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds.
The serial bonds which the Portfolios may purchase are limited to short-term
serial bonds---those with original or remaining maturities of thirteen months or
less. The Portfolios may purchase long-term bonds provided that they have a
remaining maturity of thirteen months or less or, in the case of bonds called
for redemption, the date on which the redemption payment must be made is within
thirteen months. The Portfolios may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Portfolio's commitment to
put the bond back to the issuer at par at a designated time within thirteen
months and the issuer's commitment to so purchase the bond at such price and
time.
The Portfolios which invest in municipal obligations may invest in tender
option bonds. A tender option bond is a municipal obligation (generally held
pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, 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
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portfolio maturity of a Portfolio. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Consequently, tender option bonds are deemed
to be liquid unless, in the opinion of the Adviser, the credit quality of the
bond issuer and the financial institution is deemed, in light of the relevant
Portfolio's credit quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios intend to invest in tender option bonds the interest on
which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such tender option
bonds and thus will not be entitled to treat such interest as exempt from such
tax. A similar risk exists for certain other investments subject to puts or
similar rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. The Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios intend to manage their respective
portfolios in a manner designed to eliminate or minimize any adverse impact from
the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds,
there are a variety of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obliga tions,
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.
15
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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.
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
16
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such local obligations in the event of default in the absence of a specific
guarantee or pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32
million represents over 12% of the total United States population and grew by
27% in the 1980s. While California's substantial population growth during the
1980's stimulated local economic growth and diversification and sustained a real
estate boom between 1984 and 1990, it has increased strains on California's
limited water resources and demands for government services and may impede
future economic growth. Population growth slowed since 1991 even while
substantial immigration has continued, due to a significant increase in
outmigration by California residents. Generally, the household incomes of new
residents have been substantially lower (and their education and welfare
utilization higher) than those of departing households, which may have a major
long-term socioeconomic and fiscal impact. However, with the California economy
improving, the recent net outmigration within the Continental U.S. is expected
to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs. The largest job losses have
been in Southern California, led by declines in the aerospace and construction
industries. Most of the losses were related to cuts in lost federal defense
spending.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, electronics, exports, transportation, recreation and services. This
growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels are expected to be reached in 1996. Unemployment in California is down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate.
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Orange County. On December 6, 1994, Orange County, California (the
-------------
"County"), together with its pooled investment funds (the "Pooled Funds") filed
for protection under chapter 9 of the federal Bankruptcy Code, after reports
that the Pooled Funds had suffered significant market losses in their
investments causing a liquidity crisis for the Pooled Funds and the County.
More than 180 other public entities, most but not all located in the County,
were also depositors in the Pooled Funds. The County estimated the Pooled
Funds' loss at about $1.8 billion, or 22% of its initial deposits of around $7.5
billion.
Many of the entities which kept money in the Pools (Pool Participants),
including the County, faced cash flow difficulties, suffered ratings
adjustments, and implemented cuts in personnel and programs. Some obligations
of the County and certain other Pool participants had technical defaults, or
were rescheduled. The Bankruptcy Court has approved a settlement agreement
between the County and most of the other Pool participants which provided about
80% (90% in the case of school districts) return of cash invested, with the
balance to be repaid over time, including from potential recoveries in lawsuits.
The County has implemented a financial recovery plan which includes significant
personnel cuts, and refinancing of current debts using new funds transferred to
the County from certain other local governments pursuant to special legislation
adopted in late 1995.
The State of California has no existing obligation with respect to any
outstanding obligations or securities of the County or any of the other
participating entities. However, the State may be obligated to ensure that
school districts have sufficient funds to operate or to maintain certain county
administered state programs. As of January 1, 1996, no school districts which
were Pool participants had become insolvent.
Constitutional and Statutory Limitations on Taxes and Appropriations
- --------------------------------------------------------------------
Limitations on Taxes. Certain California Instruments may be obligations
--------------------
of issuers which rely in whole or in part, directly or indirectly, on ad valorem
property taxes as a source of revenue. The taxing power of California local
governments and districts is limited by Article XIIIA of the California
constitution, also known as "Proposition 13." Briefly, Article XIIIA limits to
1% of full cash value the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of 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
18
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earlier), subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several lawsuits have
been filed challenging the acquisition-based assessment system of Proposition
13, and on June 18, 1992 the U.S. Supreme Court announced a decision upholding
Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax". Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
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.
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"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual
adjustment factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies of their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Instruments. It is not presently possible to predict the
outcome of any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on outstanding
----------
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.8 billion at February 1,
1996. In FY1994-95, debt service on general obligation bonds and lease purchase
debt was approximately 5.3% of General Fund revenues. State voters approved
$5.0 billion of new bond authorizations on the March 26, 1996 ballot, and
additional bonds are expected to be placed on the November 5, 1996 ballot.
20
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Recent Financial Results. The principal sources of General Fund revenues
------------------------
in 1994-1995 were the California personal income tax (43% of total revenues),
the sales tax (34%), bank and corporation taxes (13%), and the gross premium tax
on insurance (3%). California maintains a Special Fund for Economic
Uncertainties, derived from General Fund revenues, as a reserve to meet cash
needs of the General Fund.
General. Throughout the 1980s, California state spending increased rapidly
-------
as California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
--------------
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Years 1991-92 to 1994-95, including:
. significant cuts in health and welfare program expenditures;
. 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
21
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some other districts to local school districts, thereby reducing state funding
for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so as two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures
were essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995. The 1996-97 Governor's Budget projects complete
elimination of the deficit by June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the 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.
22
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The State's cash shortfalls also required the State Controller to issue
revenue anticipation warrants maturing in the following fiscal year in order to
pay the State's continuing obligations. The State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and warrants (both forms of short-term cash flow financing) were issued in
the period from June 1992 to July 1994, often needed to pay previously-maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The State issued $7.0 billion of short-term debt in July 1994 to meet its
cash flow needs and to finance the deferral of part of its accumulated deficit
to the 1995-96 fiscal year. In order to assure repayment of $4.0 billion of
this borrowing which matures on April 25, 1996, the State enacted legislation
(the "Trigger Law") which could have led to automatic, across-the-board budget
cuts in General Fund expenditures if cash flow projections made at certain times
deteriorated from estimates made in July 1994 when the borrwings were made.
However, the State's improved finances as a result of the economic recovery have
made such action unnecessary.
Current Budget. For the first time in four years, the State entered the
--------------
1995-96 fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased cut in
personal income and business taxes, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projected General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
years. Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance's most recent projections are that, after repaying the
last of the carryover budget deficit, there would be a positive balance of about
$50 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1996.
The Department of Finance projected cash flow borrowings in the 1995-96
Fiscal Year would be the smallest in many years, comprising $2.0 billion of
notes issued in April, 1996, and maturing on June 28, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the Department
predicts no further need for borrowing over the end of the fiscal year.
The principal features of the 1995-96 Budget Act, in addition to those
noted above, were additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
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The Governor's Proposed Budget for the 1996-97 Fiscal Year (the Governor's
Budget), released on January 10, 1996, updated financial projections for the
current year. Although improved economic conditions will result in
substantially larger revenues, these will be offset by greater expenditures,
with no significant change in the projected year-end fund balance.
The Governor's Budget proposes General Fund spending in 1996-97 of $45.2
billion, with revenues of $45.6 billion, leaving a budget reserve in the SFEU of
about $400 million. The Governor has again proposed a three-year phased 15%
reduction of personal income and corporate tax rates. The Governor's Budget
also assumed implementation of certain previously-approved cuts in health and
welfare costs, adoption of further cuts in welfare payments, the adoption of
federal welfare reform, and receipt of new federal aid for illegal immigrant
costs. As of April, 1996, many of these federal actions had not taken place,
leaving the the Governor's Budget plan with larger expenditures than
anticipated, which will have to be addressed in the final budget action. The
Governor's Budget proposed increased expenditures for K-12 school aid, higher
education, and corrections. The Governor's Budget projected annual cash flow
borrowing of about $3.2 billion.
Bond Ratings. State general obligation bond ratings were reduced in July,
------------
1994 to "A1" by Moody's Investors Services, Inc. ("Moody's") and "A" by Standard
& Poor's Ratings Group ("S&P"). Both of these ratings were reduced from "AAA"
levels which California held until late 1991. There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of California to make
payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal proceedings
------------------
(described in California's recent financial statements) that, if decided against
California, may require California to make significant future expenditures or
may substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the state's
recent budget compromises. The matters covered by these lawsuits include a
deferral of payments by California to the Public Employees Retirement System,
reductions in welfare payments and the use of certain cigarette tax funds for
health costs. All of these cases are subject to 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
24
<PAGE>
of the State of California that issue municipal obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State
of California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. At the start of the 1995-96
fiscal year, Los Angeles County, the largest in the State, faced a nominal $1.2
billion gap in its $12 billion budget, half of which was in the County health
care system. The gaps were closed only with significant cuts in services and
personnel, particularly in the health care system, federal aid, and transfer of
some funds from other local governments to the County pursuant to special
legislation. The County's debt was downgraded by Moody's and S&P in the summer
of 1995.
Assessment Bonds. California Instruments which are assessment bonds may be
----------------
adversely affected by a general decline in real estate values or a slowdown in
real estate sales
25
<PAGE>
activity. In many cases, such bonds are secured by land which is undeveloped
at the time of issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such development may not
occur or may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most cases the issuer
of these bonds is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except from amounts, if any,
in a reserve fund established for the bonds.
California Long-Term Lease Obligations. Certain California long-term lease
--------------------------------------
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g. due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a state receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State of California was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit was the invalidity of the District's lease. The trial
court upheld the validity of the lease, and the case was subsequently settled.
Any ultimate judgment in any future case against the position taken by the
Trustee may have adverse implications for lease transactions of a similar nature
by other California entities.
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),
26
<PAGE>
including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California Instruments in which the California Portfolio may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Instruments.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Portfolio could be affected by
an interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be
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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
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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
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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 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,
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.
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STATE BUDGET. The State Constitution requires the governor (the "Governor") to
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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 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
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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 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
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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 no assurances that the State Legislature will
enact welfare reform proposals as submitted by the Governor and as required
under federal law.
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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
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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.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
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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
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(i.e., borrowing for more than one year) unless the borrowing is authorized in a
---
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except
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in cases where the Governor and the legislative leaders have certified the need
for additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings.
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
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million in certificates of participation during the State's 1996-97 fiscal year
for equipment purchases. The 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.
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Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller 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 of New York, on January 21, 1994, the
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State entered into a settlement agreement 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
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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, 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 commit ments 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 arrange ments 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
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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
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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, 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
Legisla ture 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 Portfolios 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 authoriz ing 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
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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 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
39
<PAGE>
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 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
40
<PAGE>
$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 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.
41
<PAGE>
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 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.
42
<PAGE>
The Portfolios value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Portfolio's net asset value. Since the
value of a standby commitment is dependent on the ability of the standby
commitment writer to meet its obligation to repurchase, the policy of each
Portfolio that may enter into standby commitment transactions is to enter into
such transactions only with banks, brokers or dealers which represent a minimal
risk of default. The duration of standby commitments will not be a factor in
determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt California Portfolio were series, has received a ruling from the
Internal Revenue Service to the effect that it is considered the owner of the
municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to it. The Internal Revenue Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intends to
take the position that it is the owner of any municipal obligations acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that its distributions of tax-exempt interest earned with respect
to such municipal obligations will be tax-exempt for its unitholders. There is
no assurance that standby commitments will be available to a Portfolio nor has
any Portfolio assumed that such commitments will continue to be available under
all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Portfolio
without the approval of the majority of outstanding voting securities of that
Portfolio (which, under the Investment Company Act and the rules thereunder and
as used in the Prospectus and this Statement of Additional Information, means
the lesser of (1) 67% of the units of that Portfolio present at a meeting if the
holders of more than 50% of the outstanding units of that Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding units of that
Portfolio). Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an
43
<PAGE>
acquisition or encumbrance of securities or assets of, or borrowings by or on
behalf of, a Portfolio, with the exception of borrowings permitted by Investment
Restriction (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 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 that (a) 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
44
<PAGE>
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 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 securities of a
single open-end investment company or series thereof with substantially the same
fundamental investment objectives, restrictions and policies as the
Portfolio.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following non-fundamental policy which may
be changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on behalf of any Portfolio:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a Portfolio'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.
45
<PAGE>
(c) purchase additional securities if the Portfolio's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) make short sales of securities, except short sales against the
box.
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 either First or Second Tier securities. Portfolio
diversification. The Prime Obligations, Government, Treasury Obligations, Money
Market, Federal and Treasury Instruments Portfolios may not invest more than 5%
of their total assets (taken at amortized cost) 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. 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 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
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<PAGE>
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, au thorities 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 and
NY, NY 10019 Chief Financial Officer, Coty
Inc. (since April 1996);
President, ABN Associates
(since June 1994) Retired.
Senior Vice President of Scott
Paper until June 1994 Company;
Director of Arkwright Mutual
Insurance Company; Trustee of
International House of
Philadelphia; Member of
Cornell University Council;
Trustee of the Walnut Street
Theater.
*David B. Ford, 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 Goldman Sachs
Asset Management (since
December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachu-
setts Financial Services
(prior thereto).
</TABLE>
47
<PAGE>
<TABLE>
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 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
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation
Bryn Mawr, PA 19010 (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 York, 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).
</TABLE>
48
<PAGE>
<TABLE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One Northfield Plaza 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 Private 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, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs Funds
Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Manage-
New York, NY ment (since February 1994);
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, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- --------------------
<S> <C> <C>
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and
Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset Management
(since 1993); Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which Goldman Sachs, GSAM or an affiliate thereof
is the investment adviser, administrator and/or distributor. As of April ___,
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.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period one-year ended
December 31, 1996:
51
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Goldman
Benefits Sachs Mutual
Aggregate Accrued as Funds
Compensation Part of (including
from the Portfolio's the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $ $0 $
Ashok N. Bakhru $ $0 $
Marcia L. Beck*** $ $0 $
David B. Ford $ $0 $
Alan A. Shuch $ $0 $
Jackson W. Smart $ $0 $
William H. Springer $ $0 $
Richard P. Strubel $ $0 $
- --------------
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ___ mutual funds,
including the nine portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
52
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) of
each Portfolio, on an annualized basis, to .43% of the average daily net assets
of that Portfolio. The amount of such reductions or limits, if any, 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 not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Money
Market, Federal, Treasury Instruments, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios' annual total operating expenses to (excluding fees of Service
Organizations).__%, .__%, .__%, .__% and .__%, respectively, of average daily
net assets and for each other Portfolio to .41% of average daily net assets.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the 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
53
<PAGE>
cost of legal and certain accounting services rendered by employees of Goldman
Sachs with respect to the 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 ex penses 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>
Prime Obligations Portfolio $6,728,074 $9,135,344
Money Market Portfolio 2,618,275 2,663,551
Treasury Obligations Portfolio 3,206,490 3,545,307
Treasury Instruments Portfolio 1,079,236 687,965
Government Portfolio 3,259,056 4,804,362
Federal Portfolio 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,030,447 867,058
Tax-Exempt New York Portfolio 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:
54
<PAGE>
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Money Market Portfolio $ 436,325 $ 443,925
Treasury Instruments Portfolio 1,438,992 917,292
Federal Portfolio 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,518,129 1,749,116
Tax-Exempt New York Portfolio 109,464 123,050
</TABLE>
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 expense would have
been incurred for the periods indicated:
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Prime Obligations Portfolio $ 347,317 $ 635,085
Money Market Portfolio 135,715 301,326
Treasury Obligations Portfolio 203,882 371,456
Treasury Instruments Portfolio 223,652 150,525
Government Portfolio 276,785 526,310
Federal Portfolio 302,153 326,417
Tax-Exempt Diversified Portfolio 239,829 217,296
Tax-Exempt California Portfolio 19,625 34,612
Tax-Exempt New York Portfolio 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
55
<PAGE>
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 re search team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service costs,
liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs also serves as the Portfolios' transfer agent. Goldman Sachs provides
customary transfer agency services to the Portfolios, including the handling of
unitholder communications, the processing of unitholder transactions, the
maintenance of unitholder account records, payment of dividends and
distributions and related functions. For these services, Goldman Sachs receives
.04% (on an annualized basis) of the average daily net assets with respect to
each Portfolio (other than the Prime Obligations Portfolio). With respect to
the Prime Obligations Portfolio, Goldman Sachs is entitled to receive a fee from
the Portfolio equal to the classes proportionate share of the total transfer
agency fees borne by the Portfolio, which are equal to $12,000 per year plus
$7.50 per account, together with out-of-pocket expenses (including those out of
pocket expenses payable to servicing agents) applicable to ILA Class B Units and
.04% of the average daily net assets of the other classes of the Prime
Obligations Portfolio. Goldman Sachs may from time to time agree that the fee
it would otherwise be entitled to receive under its transfer agency agreement
will be reduced.
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>
<S> <C> <C>
12/31/96 12/31/95 12/31/94
Prime Obligations Portfolio $ 768,923 $1,044,039
Money Market Portfolio 349,060 355,140
Treasury Obligations Portfolio 366,456 405,178
Treasury Instruments Portfolio 287,798 183,457
Government Portfolio 372,463 549,070
Federal Portfolio 908,708 679,243
Tax-Exempt Diversified Portfolio 607,252 699,643
Tax-Exempt California Portfolio 117,765 99,092
Tax-Exempt New York Portfolio 39,298 32,139
</TABLE>
56
<PAGE>
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 ___, 1996, Goldman
Sachs and its consolidated subsidiaries had assets of approximately $____
billion and partners' capital of $____ billion. Goldman Sachs became registered
as an investment adviser in 1981. As of March ___, 1997, Goldman Sachs, together
with its affiliates, acted as investment adviser, administrator or distributor
for approximately $____ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all other
accounts managed by GSAM for execution with many firms. GSAM uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any. Securities purchased and
sold by the Portfolios are generally traded in the over-the-counter market on a
net basis (i.e., 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.
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<PAGE>
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in view
of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for more
than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Portfolio is concerned.
Each Fund believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker/dealers: [insert names].
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, or their parents ($ in thousands): [insert names].
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): [insert names].
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): [insert names].
58
<PAGE>
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, President's Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day.
Each Portfolio's securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $ 1.00 per
unit, which the Board of Trustees has determined to be in the best interest of
the Portfolios and their unitholders. This method involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides 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 in vestments 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
59
<PAGE>
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."
The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B Units (Prime Obligations
Portfolio only) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of units of a Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the unitholders of the Trust or (iv) at any other time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Portfolio's units.
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<PAGE>
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.
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) - 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.
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<PAGE>
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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
62
<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
- -------------------------
</TABLE>
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations 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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
63
<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
</TABLE>
- -------------------------
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, a California State
personal income tax rate of 11.0% is being assumed in addition to the 39.6%
federal tax rate, for a combined tax rate of 46.2%. With respect to the Tax-
Exempt New York Portfolio, the tax equivalent yields are being shown under two
scenarios. The first scenario assumes a federal marginal tax rate of 39.6% and
a New York State personal income tax rate of 7.594%, for a combined tax rate of
44.2%. The second scenario assumes a New York City personal income tax rate of
4.46% in addition to the above federal and New York, State tax rates, for a
combined tax rate of 46.9%. The combined tax rates assume full deductibility of
state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed 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 Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall
Street Journal.
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<PAGE>
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 annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock or securities or certain
other investments held less than three months; and (c) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Portfolio's total gross assets is represented by cash and
cash items (including receivables), U.S. Government securities, securities of
other regulated investment companies and other securities limited, in respect of
any one issuer, to an amount not greater in value than 5% of the value of the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Portfolio's total assets
is invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Portfolio and engaged in the same, similar or
related trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Portfolio
distributes at least 90% of its investment company taxable income (generally all
of its net taxable income other than "net capital gain," which is the excess of
net long-term capital gain over net short-term capital loss) for such year and,
in the case of any Portfolio that earns tax-exempt interest, at least 90% of the
excess of the tax-exempt interest it earns over certain disallowed deductions.
A Portfolio will be subject to federal income tax at regular corporate rates on
any investment company taxable income or net capital gain that it does not
distribute for a taxable year. In order to avoid a non-deductible 4% federal
excise tax, each Portfolio must distribute (or be deemed
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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 over net short-term capital loss
are taxable to unitholders as long-term capital gain, regardless of the length
of time the units of a Portfolio have been held by such unitholders, and also
will not qualify for the corporate dividends-received deduction. A Portfolio's
net realized capital gains for a taxable year are computed by taking into
account realized capital losses, including any capital loss carryforward of that
Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Distributions paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any tax-exempt distributions attributable to interest on
certain "private activity bonds," if any, received by a Portfolio may constitute
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 and the corporate environmental tax. To
the extent that the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios invest in certain short-term instruments, including
repurchase agreements, the interest on which is not exempt from Federal income
tax, any distributions of income from such invest ments will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred
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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 under the terms of applicable U.S. income
tax treaties in some cases, and each Portfolio intends to satisfy any procedural
requirements to qualify for benefits under these treaties. Although no
Portfolio anticipates that more than 50% of the value of its total assets at the
close of a taxable year will be composed of securities of foreign corporations,
if the 50% requirement were satisfied, a Portfolio could make an election under
Code Section 853 to permit its unitholders to claim a credit or deduction on
their federal income tax returns for their pro rata portion of qualified taxes
paid by that Portfolio in foreign countries. In the event such an election is
made, unitholders will be required to include their pro rata share of such taxes
in gross income and will be entitled to claim a foreign tax credit or deduction
with respect to such taxes, subject to certain limitations under the Code.
Unitholders who are precluded from taking such credits or deductions will
nevertheless be taxed on their pro rata share of the foreign taxes included in
their gross income, unless they are otherwise exempt from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service
all taxable distributions, except in the case of certain exempt unitholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate of
31% in the case of nonexempt unitholders who fail to furnish the Portfolio with
their taxpayer identification number and with certain certifications required by
the Internal Revenue Service or if the Internal Revenue Service or a broker
notifies a
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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 Portfolio reasonably estimates
that at least 95% of its distributions will be exempt-interest dividends. The
Portfolios may refuse to accept an application that does not contain any
required taxpayer identification number or certification that the number
provided is correct or that the investor is an exempt recipient. If the
withholding provisions are applicable, any such distributions, whether taken in
cash or reinvested in units, will be reduced by the amounts required to be
withheld. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
Redemptions and exchanges of units will generally not result in taxable
gain or loss, but a loss may be recognized to the extent a CDSC is imposed on
the redemption or exchange of ILA Class B Units.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder on the unitholder's federal
income tax return. The Portfolios will inform unitholders of the federal income
tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios, the amounts that qualify as exempt-interest
dividends and any portions of such amounts that constitute tax preference items
under the federal alternative minimum tax. Unitholders who receive exempt-
interest dividends and have not held their units of the applicable Portfolio for
its entire taxable year may have designated as tax-exempt or as a tax preference
item a percentage of their distributions which is not exactly equal to a
proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in such Portfolio. Each
unitholder should consult his or her own tax advisor to determine the tax
consequences of an investment in a Portfolio in the unitholder's own state and
locality.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Unitholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities,
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insurance companies and financial institutions. Each unitholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and non-
U.S. tax consequences of ownership of units of a Portfolio, including the
possibility that such a unitholder may be subject to a U.S. withholding tax at a
rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
certain distributions from a Portfolio and, if a current IRS Form W-8 or
acceptable substitute is not on file with the Portfolio, may be subject to
backup withholding on certain payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust and
its unitholders under such laws may differ from their treatment under Federal
income tax laws, and 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, intangibles tax consequences of investments by the
Portfolios in securities issued by the particular state or the U.S. Government
or its various agencies or instrumentalities, because many states (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 intangibles tax the value of the
units of such companies attributable to such obligations, subject to certain
state-specific requirements and/or limitations. See also the discussion below of
these applicable provisions in California and New York.
Assuming that each Portfolio qualifies as a regulated investment company
for federal income tax purposes, each Portfolio, as a series of a Massachusetts
business trust, will not be subject to any income, franchise or corporate excise
tax in Massachusetts. Provided that they qualify as regulated investment
companies and incur no federal income tax liability, the Portfolios may still be
subject to New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
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Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends attributable to interest on obligations the interest
on which is exempt from California personal income tax provided that the
Portfolio satisfies the requirement of California law that at least 50% of its
assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California Law. Distributions from the Tax-Exempt California Portfolio which are
attributable to sources other than those described in the second preceding
sentence will generally be taxable to such unitholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate unitholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by unitholders to purchase
or carry units of the Tax-Exempt California Portfolio will not be deductible for
California personal income tax purposes.
In addition, any loss realized by a unitholder of the Tax-Exempt California
Portfolio upon the sale of units held for six months or less may be disallowed
to the extent of any exempt-interest dividends received with respect to such
units. Moreover, any loss realized upon the redemption of units within six
months from the date of purchase of such units and following receipt of a long-
term capital gains distribution will be treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the re demption 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
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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
Goldman Sachs Money Market Trust was established as a Massachusetts
business trust by a Declaration of Trust dated De cember 6, 1978 and reorganized
as part of Goldman Sachs Trust, a Delaware business trust by a Declaration of
Trust dated January 28, 1997. Each of the Portfolios became a series of the
Trust pursuant ot a reorganization which occurred on April 30,1997.
Each unitholder is deemed to have expressly assented and agreed to the
terms of the Declaration of Trust and is deemed to be party thereto. The
authorized capital of the Trust consists of an unlimited number of units of
beneficial interest. The Trustees have authority under the Declaration of Trust
to create and classify units of beneficial interest in separate series without
further action by unitholders. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series or portfolio of units into one or
more classes. The Trustees have authorized the issuance of three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have authorized a fourth class of
units, ILA Class B Units with respect to the Prime Obligations Portfolio.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio represents an equal proportionate
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interest in the assets belonging to that Portfolio. It is contemplated that most
units (other than ILA Class B 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
Units generally are only issued upon exchange from Class B Shares 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 are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. ILA Class B Units of the
Prime Obligations Portfolio bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.75% of the average daily net assets attributable
to ILA Class B Units. ILA Class B Units of the Prime Obligations Portfolio also
bear the cost of an Authorized Dealer Service Plan at an annual rate of up to
0.25% of the average daily net assets of the Prime Obligations Portfolio
attributable to ILA Class B Units.
It is possible that an institution or its 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 and ILA Class B Units
each have certain exclusive voting rights on matters relating to their
respective plans. Units of each class may be exchanged only for Units of the
same class in another Portfolio or, in the case of the Prime Obligations
Portfolio, shares of the corresponding class of certain other mutual funds
sponsored by Goldman Sachs. Except as described above, the four classes of
units are identical. Certain aspects of the Units may be altered, after advance
notice to unitholders,
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if it is deemed necessary in order to satisfy certain tax regulatory
requirements.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio is entitled to one vote per unit; however, separate votes
will be taken by each Portfolio or class (or by more than one Portfolio or class
voting as a single class if similarly affected) on matters affecting only that
individual Portfolio or class (or those affected Portfolios or classes) or as
otherwise required by law. Units are freely transferable and have no
preemptive, subscription or conversion rights. All units issued and outstanding
are fully paid and nonassessable. The Declaration of Trust provides for
unitholder voting only for the election or removal of one or more Trustees, if a
meeting is called for that purpose, and for certain other designated matters.
The Trust does not generally hold annual or other meetings of unitholders. The
units of the Portfolios have non-cumulative voting rights, which means that the
holders of more than 50% of the units voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the units voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Each Trustee serves until the next meeting of unitholders, if any,
called for the purpose of electing or reelecting such Trustee or successor to
such Trustee, and until the election and qualification of such successor, if
any, or until such Trustee sooner dies, resigns, retires or is removed by the
unitholders or two-thirds of the Trustees.
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were [insert names].
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As of April ___, 1997, the only holder of record of 5% or more of the
outstanding units of the Federal Portfolio was [insert names].
As of April ___, 1997, the only holder of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was [insert names].
UNITHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Delaware business
trust," which is the form in which many mutual funds are organized. Under
Delaware law, the unitholders of the Delaware trust are not generally subject to
liability for the debts or obligations of the trust. Similarly, Delaware law
provides that a Portfolio will not be liable for the debts or obligations of any
other series of the Delaware business 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 of the 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 of the Trust provides for
indemnification by the relevant Fund for any loss suffered by a unitholder as a
result of an obligation of the Portfolio. The Declaration of Trust of the 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.
On any matter submitted to a vote of the Unitholders of the Trust, all
Units shall be voted in the aggregate not by individual Portfolio or Class,
except (a) when required by the 1940 Act, Units shall be voted by individual
Portfolio or Class, and (b) when the Trustees have determined that the matter
affects the interests of only one or more Portfolios or Classes, then only the
Unitholders of all such Portfolios or Classes shall be entitled to vote. As
determined by the Trustees without the vote or consent of Unitholders, on any
matter submitted to a vote of Unitholders, either (i) each whole Unit shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Unit shall be entitled to a proportionate fractional vote or (ii)
each dollar of Net Asset Value (number of Units owned times Net Asset Value per
share of such Portfolio or Class, as applicable) shall be entitled to one vote
on any matter on which such Units are entitled to vote and each fractional
dollar amount shall be entitled to a proportionate fractional vote. There is no
cumulative voting in the election of Trustees.
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In connection with the establishment of one or more Portfolios or Classes,
the Trustees establishing such Portfolios or Classes may appoint, to the extent
permitted by the Delaware Business Trust Act, separate Trustees with respect to
such Portfolios or Classes (the "Series Trustees"). Series Trustees may, but
are not required to, serve as Trustees of the Trust or any other Portfolio or
Class of the Trust. To the extent provided by the Trustees in the appointment
of Series Trustees, the Series Trustees may have, to the exclusion of any other
Trustee of the Trust,all the powers and authority of Trustees with respect to
such Portfolio or Class, but may have no power or authority with respect to any
other Portfolio or Class. Unitholders for a Portfolio or Class with respect to
which Series Trustees have been appointed shall only be entitled to vote in the
election of such Series Trustees.
Upon the vote of a majority of the Units outstanding and entitled to vote
of the Trust or of each Portfolio to be affected, the Trustees may (i) sell and
convey all or substantially all of the assets of all Portfolios or any affected
Portfolio to another Portfolio or to another entity which is an open-end
investment company as defined in the 1940 Act, or is a Portfolio thereof, for
adequate consideration, which may include the assumption of all outstanding
obligations, taxes and other liabilities, accrued or contingent, of the Trust or
any affected Portfolio, and which may include Units of or interests in such
Portfolio, entity, or Portfolio thereof; or (ii) at any time sell and convert
into money all or substantially all of the assets of all Portfolios or any
affected Portfolio. The Trustees may take any of the actions specified above
without obtaining the vote of a majority of the outstanding Units of the Trust
or any Portfolio if a majority of the Trustees determines, in their sole
discretion, that the continuation of the Trust of Portfolio is not in the best
interests of the Trust, such Portfolio, or their respective Unitholders. Also,
the Trustees may, without Unitholder approval unless such approval is required
by applicable federal law, (i) cause the Trust to merge or consolidate with or
into one or more entities, if the surviving or resulting entity is the Trust or
another open-end management investment company under the 1940 Act, or a
Portfolio thereof, (ii) cause the Units to be exchanged under or pursuant to any
state or federal statute to the extent permitted by law, or (iii) cause the
Trust to incorporate under the laws of Delaware or any other U.S. jurisdiction.
The Trustees may, without Unitholder approval, invest all or a portion of the
assets of any Portfolio, or dispose of all or a portion of the assets of any
Portfolio, and invest the proceeds of such disposition in interests issued by
one or more other investment companies registered under the Investment Company
Act. The Trustees may, without Unitholder approval unless such approval is
required by applicable law, cause a Portfolio that is organized in the
master/feeder fund structure to withdraw or redeem its assets from the master
fund and cause such Portfolio to invest its assets directly in securities and
other financial instrument or in another master fund.
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In addition to the requirements set forth in Section 3816 of the Delaware
Business Trust Act, the Declaration of Trust provides that a Unitholder 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 the
Delaware Business Trust Act who hole at least 10% of the outstanding Units of
the Trust, or 10% of the outstanding Units of the Portfolio 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 Unitholder request and to investigate the basis of such claim. The
Trustees shall be entitled to retain counsel or other advisers in considering
the merits of the request and shall require an undertaking by the Unitholders
making such request to reimburse the Trust for the expense of any such advisers
in the event that the Trustees determine not to bring such action.
The Declaration of Trust of the 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.
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
_________________, independent public accountants, [insert address], have
been selected as auditors of the Trust. In addition to audit services,
________________ 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,
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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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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category. The
modifier 1 indicates that the obligation ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term
debt obligations. Prime-1 or P-1 repayment ability will normally be evidenced by
many of the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
A-1
<PAGE>
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG to reflect such
characteristics as payment upon periodic demand rather than fixed maturity dates
and payment relying on external liquidity. Additionally, investors should be
alert to the fact that the source of payment may be limited to the external
liquidity with no or limited legal recourse to the issuer in the event the
demand is not met VMIG-1, and VMIG-2 ratings carry the same definitions as MIG-
1, and MIG-2, respectively.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
PLUS (+) OR MINUS (-): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA category.
A-2
<PAGE>
Short-Term Ratings
- ------------------
A-1: S&P's Commercial Paper ratings are current assessments of the
likelihood of timely payment of debt considered short-term in the relevant
market. The A-1 designation is the highest category and indicates that the
degree of safety regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus ( + )
sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The fol lowing criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 -- Speculative capacity to pay principal and interest.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, S&P's note rating symbols
are used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
A-3
<PAGE>
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: Long-term fixed income securities which are rated AAA are judged to
be of the highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: Long-term fixed income securities which are rated AA are judged to be
of high credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
Duff & Phelps applies modifiers, AA+ and AA- in the AA category for long-
term fixed income securities. The modifier AA+ indicates that the security
ranks in the higher end of the AA category: the modifier AA indicates a mid-
range ranking; and the modifier AA- indicates that the issue ranks in the lower
end of the AA category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for commercial paper and certificates of deposit.
The rating D-1+ indicates that the security has the highest certainty of timely
payment, short-term liquidity is clearly outstanding and safety is just below
risk-free U.S. Treasury short-term obligations; the rating D-1 indicates a very
high certainty of timely payment, liquidity factors are excellent and risk
factors are minimal; and the rating D-1- indicates a high certainty of timely
payment, liquidity factors are strong and risk factors are very small.
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
its obligations, which is unlikely to be affected by reasonably foreseeable
events.
A-4
<PAGE>
AA: Bonds which are rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
Fitch applies plus (" + ") and minus (" - ") modifiers in the AA category to
indicate the relative position of a credit within the rating category.
Eligible Fitch ratings for short-term debt obligations payable on demand or with
original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes
may be rated F-1 or F-2.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2: Short-term obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates a superior ability to repay principal
and interest on a timely basis.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk
versus issues rated in the highest category.
Ratings in the AA Long-Term Debt category may include a plus (+) or minus (-)
designation which indicates where within the respective category the issue is
placed.
A-5
<PAGE>
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
1. The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these
securities on the date of the Portfolios' taxable year end.
A-6
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
ILA ADMINISTRATION UNITS
- --------------------------------------------------------------------------------
Goldman Sachs Trust (the "Trust") is a no-load, open-end management investment
company (or mutual fund) which includes the Goldman Sachs - Institutional Liquid
Assets portfolios. This Statement of Additional Information relates solely to
the offering of ILA Administration Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively
the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios'
investment adviser. Goldman Sachs serves as distributor and transfer agent to
the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority that
Goldman Sachs places on serving clients' interests. As Goldman Sachs clients,
Service Organizations, as defined below, will be assigned an Account
Administrator ("AA"), who is ready to help with questions concerning their
accounts. During business hours, Service Organizations can call their AA
through a toll-free number to place purchase or redemption orders or to obtain
Portfolio account information. The AA can also answer inquiries about rates of
return and portfolio composition/
<PAGE>
holdings, and guide Service Organizations through operational details. A
Goldman Sachs client can also utilize the SMART/SM/ personal computer software
system which allows Service Organizations to purchase and redeem units and also
obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus relating to ILA Administration Units dated
May 1, 1997, as amended and supplemented from time to time. A copy of the
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............ 47
The Adviser, Distributor and
Transfer Agent................... 53
Portfolio Transactions........... 57
Net Asset Value.................. 58
Redemptions...................... 60
Calculation of Yield Quotations.. 61
Tax Information.................. 64
Organization and Capitalization.. 71
Custodian and Subcustodian....... 76
Independent Accountants.......... 76
Financial Statements............. 76
Administration Plan.............. 77
Appendix A (Description of
Securities Ratings).............. A-1
</TABLE>
<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 ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government Securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
Each 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
4
<PAGE>
specific merchandise, which are "accepted" by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties
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 only
enter into repurchase agreements with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios' custodian
or subcustodian. The repurchase price may be higher than the purchase price,
the difference being income to the Portfolio, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Portfolio
together with the repurchase price on repurchase. In either case, the income to
the Portfolio is unrelated to the interest rate on the Obligation subject to the
repurchase agreement.
Repurchase agreements pose certain risks for all entities, including the
Portfolios, that utilize them. Such risks are not unique to the Portfolios but
are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by,
5
<PAGE>
among others, the means indicated below, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally for federal income tax purposes, a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation. It is not clear whether for other purposes a court would
consider the Obligation purchased by the Portfolio subject to a repurchase
agreement as being owned by the Portfolio or as being collateral for a loan by
the Portfolio to the seller.
If in the event of bankruptcy or insolvency proceedings against the seller
of the Obligation, a court holds that the Portfolio does not have a perfected
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Portfolio would be at risk of losing some
or all of the principal and income involved in the transaction. To minimize
this risk, the Portfolios utilize custodians and subcustodians that the Adviser
believes follow customary securities industry practice with respect to
repurchase agreements, and the Adviser analyzes the creditworthiness of the
obligor, in this case the seller of the Obligation. But because of the legal
uncertainties, this risk, like others associated with repurchase agreements,
cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, 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, the Portfolio (other than the Treasury Instruments Portfolio),
together with other registered investment companies having advisory agreements
with the Adviser or any of its affiliates, may transfer uninvested cash balances
into a
6
<PAGE>
single joint account, the daily aggregate balance of which will be invested in
one or more repurchase agreements.
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 valua
tion, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios may invest in asset-
backed and receivables-backed securities. Asset-backed and receivables-backed
securities represent participations in, or are secured by and payable from,
pools of assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, corporate
receivables and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit or a
pool insurance policy issued by a financial institution or other credit
enhancements may be present. The value of a Portfolio's investments in asset-
backed and receivables-backed securities may be adversely affected by prepayment
of the underlying obligations. In addition, the risk of prepayment may cause
the value of these investments to be more volatile than a Portfolio's other
investments.
Through the use of trusts and special purpose corporations, various types
of assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being
7
<PAGE>
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 these and other types of asset-backed
securities that may be developed in the future. This Statement of Additional
Information will be amended or supplemented as necessary to reflect the Prime
Obligations and Money Market Portfolios' intention to invest in asset-backed
securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, the Portfolios will
generally not invest in an asset-backed security if the income received with
respect to its investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-backed
securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
8
<PAGE>
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
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transactions or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
reflecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the value of or return on an investment in such a
security.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments could require
the Prime Obligations and Money Market Portfolios to dispose of any then
existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities at a future date.
The price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Portfolio will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions, distributions from
which would be taxable to its unitholders. For purposes of determining a
Portfolio's average dollar weighted maturity, the maturity of
9
<PAGE>
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 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
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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 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 in strument 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
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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 secu rities are liquid. The Board of Trustees
may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes, construction loan notes,
tax-exempt commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other 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
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repayment of the notes. Tax-exempt commercial paper consists of short-term
unsecured promissory notes issued by a state or local government or an authority
or agency thereof. The Portfolios which invest in municipal obligations may
also acquire securities in the form of custodial receipts which evidence
ownership of future interest payments, principal payments or both on certain
state and local governmental and authority obligations when, in the opinion of
bond counsel, interest payments with respect to such custodial receipts are
excluded from gross income for federal income tax purposes, and in the case of
the Tax-Exempt California and Tax-Exempt New York Portfolios, exempt from
California and New York (city and state) personal income taxes, respectively.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" ("MRs") and "Municipal Certificates of Accrual on Tax-
Exempt Securities" ("M-CATS"). There are a number of other types of notes
issued for different purposes and secured differently from those described
above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
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
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local authority for capital projects are secured by annual lease rental payments
from the state or locality to the authority sufficient to cover debt service on
the authority's obligations.
Private activity bonds (a term that includes certain types of bonds the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds.
The serial bonds which the Portfolios may purchase are limited to short-term
serial bonds---those with original or remaining maturities of thirteen months or
less. The Portfolios may purchase long-term bonds provided that they have a
remaining maturity of thirteen months or less or, in the case of bonds called
for redemption, the date on which the redemption payment must be made is within
thirteen months. The Portfolios may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Portfolio's commitment to
put the bond back to the issuer at par at a designated time within thirteen
months and the issuer's commitment to so purchase the bond at such price and
time.
The Portfolios which invest in municipal obligations may invest in tender
option bonds. A tender option bond is a municipal obligation (generally held
pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, 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
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portfolio maturity of a Portfolio. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Consequently, tender option bonds are deemed
to be liquid unless, in the opinion of the Adviser, the credit quality of the
bond issuer and the financial institution is deemed, in light of the relevant
Portfolio's credit quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios intend to invest in tender option bonds the interest on
which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such tender option
bonds and thus will not be entitled to treat such interest as exempt from such
tax. A similar risk exists for certain other investments subject to puts or
similar rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. The Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios intend to manage their respective
portfolios in a manner designed to eliminate or minimize any adverse impact from
the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds,
there are a variety of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obliga tions,
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.
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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.
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
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such local obligations in the event of default in the absence of a specific
guarantee or pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32
million represents over 12% of the total United States population and grew by
27% in the 1980s. While California's substantial population growth during the
1980's stimulated local economic growth and diversification and sustained a real
estate boom between 1984 and 1990, it has increased strains on California's
limited water resources and demands for government services and may impede
future economic growth. Population growth slowed since 1991 even while
substantial immigration has continued, due to a significant increase in
outmigration by California residents. Generally, the household incomes of new
residents have been substantially lower (and their education and welfare
utilization higher) than those of departing households, which may have a major
long-term socioeconomic and fiscal impact. However, with the California economy
improving, the recent net outmigration within the Continental U.S. is expected
to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs. The largest job losses have
been in Southern California, led by declines in the aerospace and construction
industries. Most of the losses were related to cuts in lost federal defense
spending.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, electronics, exports, transportation, recreation and services. This
growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels are expected to be reached in 1996. Unemployment in California is down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate.
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Orange County. On December 6, 1994, Orange County, California (the
-------------
"County"), together with its pooled investment funds (the "Pooled Funds") filed
for protection under chapter 9 of the federal Bankruptcy Code, after reports
that the Pooled Funds had suffered significant market losses in their
investments causing a liquidity crisis for the Pooled Funds and the County.
More than 180 other public entities, most but not all located in the County,
were also depositors in the Pooled Funds. The County estimated the Pooled
Funds' loss at about $1.8 billion, or 22% of its initial deposits of around $7.5
billion.
Many of the entities which kept money in the Pools (Pool Participants),
including the County, faced cash flow difficulties, suffered ratings
adjustments, and implemented cuts in personnel and programs. Some obligations
of the County and certain other Pool participants had technical defaults, or
were rescheduled. The Bankruptcy Court has approved a settlement agreement
between the County and most of the other Pool participants which provided about
80% (90% in the case of school districts) return of cash invested, with the
balance to be repaid over time, including from potential recoveries in lawsuits.
The County has implemented a financial recovery plan which includes significant
personnel cuts, and refinancing of current debts using new funds transferred to
the County from certain other local governments pursuant to special legislation
adopted in late 1995.
The State of California has no existing obligation with respect to any
outstanding obligations or securities of the County or any of the other
participating entities. However, the State may be obligated to ensure that
school districts have sufficient funds to operate or to maintain certain county
administered state programs. As of January 1, 1996, no school districts which
were Pool participants had become insolvent.
Constitutional and Statutory Limitations on Taxes and Appropriations
- --------------------------------------------------------------------
Limitations on Taxes. Certain California Instruments may be obligations
--------------------
of issuers which rely in whole or in part, directly or indirectly, on ad valorem
property taxes as a source of revenue. The taxing power of California local
governments and districts is limited by Article XIIIA of the California
constitution, also known as "Proposition 13." Briefly, Article XIIIA limits to
1% of full cash value the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of 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
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earlier), subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several lawsuits have
been filed challenging the acquisition-based assessment system of Proposition
13, and on June 18, 1992 the U.S. Supreme Court announced a decision upholding
Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax". Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
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.
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"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual
adjustment factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies of their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Instruments. It is not presently possible to predict the
outcome of any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on outstanding
----------
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.8 billion at February 1,
1996. In FY1994-95, debt service on general obligation bonds and lease purchase
debt was approximately 5.3% of General Fund revenues. State voters approved
$5.0 billion of new bond authorizations on the March 26, 1996 ballot, and
additional bonds are expected to be placed on the November 5, 1996 ballot.
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Recent Financial Results. The principal sources of General Fund revenues
------------------------
in 1994-1995 were the California personal income tax (43% of total revenues),
the sales tax (34%), bank and corporation taxes (13%), and the gross premium tax
on insurance (3%). California maintains a Special Fund for Economic
Uncertainties, derived from General Fund revenues, as a reserve to meet cash
needs of the General Fund.
General. Throughout the 1980s, California state spending increased rapidly
-------
as California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
--------------
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Years 1991-92 to 1994-95, including:
. significant cuts in health and welfare program expenditures;
. 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
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some other districts to local school districts, thereby reducing state funding
for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so as two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures
were essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995. The 1996-97 Governor's Budget projects complete
elimination of the deficit by June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the 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.
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The State's cash shortfalls also required the State Controller to issue
revenue anticipation warrants maturing in the following fiscal year in order to
pay the State's continuing obligations. The State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and warrants (both forms of short-term cash flow financing) were issued in
the period from June 1992 to July 1994, often needed to pay previously-maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The State issued $7.0 billion of short-term debt in July 1994 to meet its
cash flow needs and to finance the deferral of part of its accumulated deficit
to the 1995-96 fiscal year. In order to assure repayment of $4.0 billion of
this borrowing which matures on April 25, 1996, the State enacted legislation
(the "Trigger Law") which could have led to automatic, across-the-board budget
cuts in General Fund expenditures if cash flow projections made at certain times
deteriorated from estimates made in July 1994 when the borrwings were made.
However, the State's improved finances as a result of the economic recovery have
made such action unnecessary.
Current Budget. For the first time in four years, the State entered the
--------------
1995-96 fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased cut in
personal income and business taxes, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projected General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
years. Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance's most recent projections are that, after repaying the
last of the carryover budget deficit, there would be a positive balance of about
$50 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1996.
The Department of Finance projected cash flow borrowings in the 1995-96
Fiscal Year would be the smallest in many years, comprising $2.0 billion of
notes issued in April, 1996, and maturing on June 28, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the Department
predicts no further need for borrowing over the end of the fiscal year.
The principal features of the 1995-96 Budget Act, in addition to those
noted above, were additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
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The Governor's Proposed Budget for the 1996-97 Fiscal Year (the Governor's
Budget), released on January 10, 1996, updated financial projections for the
current year. Although improved economic conditions will result in
substantially larger revenues, these will be offset by greater expenditures,
with no significant change in the projected year-end fund balance.
The Governor's Budget proposes General Fund spending in 1996-97 of $45.2
billion, with revenues of $45.6 billion, leaving a budget reserve in the SFEU of
about $400 million. The Governor has again proposed a three-year phased 15%
reduction of personal income and corporate tax rates. The Governor's Budget
also assumed implementation of certain previously-approved cuts in health and
welfare costs, adoption of further cuts in welfare payments, the adoption of
federal welfare reform, and receipt of new federal aid for illegal immigrant
costs. As of April, 1996, many of these federal actions had not taken place,
leaving the the Governor's Budget plan with larger expenditures than
anticipated, which will have to be addressed in the final budget action. The
Governor's Budget proposed increased expenditures for K-12 school aid, higher
education, and corrections. The Governor's Budget projected annual cash flow
borrowing of about $3.2 billion.
Bond Ratings. State general obligation bond ratings were reduced in July,
------------
1994 to "A1" by Moody's Investors Services, Inc. ("Moody's") and "A" by Standard
& Poor's Ratings Group ("S&P"). Both of these ratings were reduced from "AAA"
levels which California held until late 1991. There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of California to make
payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal proceedings
------------------
(described in California's recent financial statements) that, if decided against
California, may require California to make significant future expenditures or
may substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the state's
recent budget compromises. The matters covered by these lawsuits include a
deferral of payments by California to the Public Employees Retirement System,
reductions in welfare payments and the use of certain cigarette tax funds for
health costs. All of these cases are subject to 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
24
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of the State of California that issue municipal obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State
of California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. At the start of the 1995-96
fiscal year, Los Angeles County, the largest in the State, faced a nominal $1.2
billion gap in its $12 billion budget, half of which was in the County health
care system. The gaps were closed only with significant cuts in services and
personnel, particularly in the health care system, federal aid, and transfer of
some funds from other local governments to the County pursuant to special
legislation. The County's debt was downgraded by Moody's and S&P in the summer
of 1995.
Assessment Bonds. California Instruments which are assessment bonds may be
----------------
adversely affected by a general decline in real estate values or a slowdown in
real estate sales
25
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activity. In many cases, such bonds are secured by land which is undeveloped
at the time of issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such development may not
occur or may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most cases the issuer
of these bonds is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except from amounts, if any,
in a reserve fund established for the bonds.
California Long-Term Lease Obligations. Certain California long-term lease
--------------------------------------
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g. due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a state receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State of California was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit was the invalidity of the District's lease. The trial
court upheld the validity of the lease, and the case was subsequently settled.
Any ultimate judgment in any future case against the position taken by the
Trustee may have adverse implications for lease transactions of a similar nature
by other California entities.
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),
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including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California Instruments in which the California Portfolio may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Instruments.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Portfolio could be affected by
an interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be
27
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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 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,
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.
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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 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
29
<PAGE>
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 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
30
<PAGE>
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 no assurances that the State Legislature will
enact welfare reform proposals as submitted by the Governor and as required
under federal law.
31
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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.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing
32
<PAGE>
(i.e., borrowing for more than one year) unless the borrowing is authorized in a
---
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except
33
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in cases where the Governor and the legislative leaders have certified the need
for additional borrowing and provided a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was first
exceeded. As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings.
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
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million in certificates of participation during the State's 1996-97 fiscal year
for equipment purchases. The 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.
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Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller 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 of New York, on January 21, 1994, the
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State entered into a settlement agreement 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
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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, 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 commit ments 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 arrange ments 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
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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
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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, 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
Legisla ture 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 Portfolios 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 authoriz ing 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
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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 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
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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 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
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$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 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.
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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 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.
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The Portfolios value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Portfolio's net asset value. Since the
value of a standby commitment is dependent on the ability of the standby
commitment writer to meet its obligation to repurchase, the policy of each
Portfolio that may enter into standby commitment transactions is to enter into
such transactions only with banks, brokers or dealers which represent a minimal
risk of default. The duration of standby commitments will not be a factor in
determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt California Portfolio were series, has received a ruling from the
Internal Revenue Service to the effect that it is considered the owner of the
municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to it. The Internal Revenue Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intends to
take the position that it is the owner of any municipal obligations acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that its distributions of tax-exempt interest earned with respect
to such municipal obligations will be tax-exempt for its unitholders. There is
no assurance that standby commitments will be available to a Portfolio nor has
any Portfolio assumed that such commitments will continue to be available under
all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Portfolio
without the approval of the majority of outstanding voting securities of that
Portfolio (which, under the Investment Company Act and the rules thereunder and
as used in the Prospectus and this Statement of Additional Information, means
the lesser of (1) 67% of the units of that Portfolio present at a meeting if the
holders of more than 50% of the outstanding units of that Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding units of that
Portfolio). Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an
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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 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 that (a) 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
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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 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 securities of a
single open-end investment company or series thereof with substantially the same
fundamental investment objectives, restrictions and policies as the
Portfolio.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following non-fundamental policy which may
be changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on behalf of any Portfolio:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a Portfolio'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.
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(c) purchase additional securities if the Portfolio's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) make short sales of securities, except short sales against the
box.
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 either First or Second Tier securities. Portfolio
diversification. The Prime Obligations, Government, Treasury Obligations, Money
Market, Federal and Treasury Instruments Portfolios may not invest more than 5%
of their total assets (taken at amortized cost) 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. 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 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
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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 and
NY, NY 10019 Chief Financial Officer, Coty
Inc. (since April 1996);
President, ABN Associates
(since June 1994) Retired.
Senior Vice President of Scott
Paper until June 1994 Company;
Director of Arkwright Mutual
Insurance Company; Trustee of
International House of
Philadelphia; Member of
Cornell University Council;
Trustee of the Walnut Street
Theater.
*David B. Ford, 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 Goldman Sachs
Asset Management (since
December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachu-
setts Financial Services
(prior thereto).
</TABLE>
47
<PAGE>
<TABLE>
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 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
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation
Bryn Mawr, PA 19010 (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 York, 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).
</TABLE>
48
<PAGE>
<TABLE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One Northfield Plaza 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 Private 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, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs Funds
Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Manage-
New York, NY ment (since February 1994);
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, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- --------------------
<S> <C> <C>
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and
Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset Management
(since 1993); Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which Goldman Sachs, GSAM or an affiliate thereof
is the investment adviser, administrator and/or distributor. As of April ___,
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.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period one-year ended
December 31, 1996:
51
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Goldman
Benefits Sachs Mutual
Aggregate Accrued as Funds
Compensation Part of (including
from the Portfolio's the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $ $0 $
Ashok N. Bakhru $ $0 $
Marcia L. Beck*** $ $0 $
David B. Ford $ $0 $
Alan A. Shuch $ $0 $
Jackson W. Smart $ $0 $
William H. Springer $ $0 $
Richard P. Strubel $ $0 $
- --------------
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ___ mutual funds,
including the nine portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
52
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) of
each Portfolio, on an annualized basis, to .43% of the average daily net assets
of that Portfolio. The amount of such reductions or limits, if any, 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 not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Money
Market, Federal, Treasury Instruments, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios' annual total operating expenses to (excluding fees of Service
Organizations).__%, .__%, .__%, .__% and .__%, respectively, of average daily
net assets and for each other Portfolio to .41% of average daily net assets.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the 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
53
<PAGE>
cost of legal and certain accounting services rendered by employees of Goldman
Sachs with respect to the 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 ex penses 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>
Prime Obligations Portfolio $6,728,074 $9,135,344
Money Market Portfolio 2,618,275 2,663,551
Treasury Obligations Portfolio 3,206,490 3,545,307
Treasury Instruments Portfolio 1,079,236 687,965
Government Portfolio 3,259,056 4,804,362
Federal Portfolio 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,030,447 867,058
Tax-Exempt New York Portfolio 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:
54
<PAGE>
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Money Market Portfolio $ 436,325 $ 443,925
Treasury Instruments Portfolio 1,438,992 917,292
Federal Portfolio 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,518,129 1,749,116
Tax-Exempt New York Portfolio 109,464 123,050
</TABLE>
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 expense would have
been incurred for the periods indicated:
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Prime Obligations Portfolio $ 347,317 $ 635,085
Money Market Portfolio 135,715 301,326
Treasury Obligations Portfolio 203,882 371,456
Treasury Instruments Portfolio 223,652 150,525
Government Portfolio 276,785 526,310
Federal Portfolio 302,153 326,417
Tax-Exempt Diversified Portfolio 239,829 217,296
Tax-Exempt California Portfolio 19,625 34,612
Tax-Exempt New York Portfolio 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
55
<PAGE>
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 re search team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service costs,
liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs also serves as the Portfolios' transfer agent. Goldman Sachs provides
customary transfer agency services to the Portfolios, including the handling of
unitholder communications, the processing of unitholder transactions, the
maintenance of unitholder account records, payment of dividends and
distributions and related functions. For these services, Goldman Sachs receives
.04% (on an annualized basis) of the average daily net assets with respect to
each Portfolio (other than the Prime Obligations Portfolio). With respect to
the Prime Obligations Portfolio, Goldman Sachs is entitled to receive a fee from
the Portfolio equal to the classes proportionate share of the total transfer
agency fees borne by the Portfolio, which are equal to $12,000 per year plus
$7.50 per account, together with out-of-pocket expenses (including those out of
pocket expenses payable to servicing agents) applicable to ILA Class B Units and
.04% of the average daily net assets of the other classes of the Prime
Obligations Portfolio. Goldman Sachs may from time to time agree that the fee
it would otherwise be entitled to receive under its transfer agency agreement
will be reduced.
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>
<S> <C> <C>
12/31/96 12/31/95 12/31/94
Prime Obligations Portfolio $ 768,923 $1,044,039
Money Market Portfolio 349,060 355,140
Treasury Obligations Portfolio 366,456 405,178
Treasury Instruments Portfolio 287,798 183,457
Government Portfolio 372,463 549,070
Federal Portfolio 908,708 679,243
Tax-Exempt Diversified Portfolio 607,252 699,643
Tax-Exempt California Portfolio 117,765 99,092
Tax-Exempt New York Portfolio 39,298 32,139
</TABLE>
56
<PAGE>
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 ___, 1996, Goldman
Sachs and its consolidated subsidiaries had assets of approximately $____
billion and partners' capital of $____ billion. Goldman Sachs became registered
as an investment adviser in 1981. As of March ___, 1997, Goldman Sachs, together
with its affiliates, acted as investment adviser, administrator or distributor
for approximately $____ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all other
accounts managed by GSAM for execution with many firms. GSAM uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any. Securities purchased and
sold by the Portfolios are generally traded in the over-the-counter market on a
net basis (i.e., 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.
57
<PAGE>
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in view
of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for more
than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Portfolio is concerned.
Each Fund believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker/dealers: [insert names].
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, or their parents ($ in thousands): [insert names].
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): [insert names].
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): [insert names].
58
<PAGE>
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, President's Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day.
Each Portfolio's securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $ 1.00 per
unit, which the Board of Trustees has determined to be in the best interest of
the Portfolios and their unitholders. This method involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides 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 in vestments 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
59
<PAGE>
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."
The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B Units (Prime Obligations
Portfolio only) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of units of a Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the unitholders of the Trust or (iv) at any other time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Portfolio's units.
60
<PAGE>
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.
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) - 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.
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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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
- -------------------------
</TABLE>
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations 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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
</TABLE>
- -------------------------
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, a California State
personal income tax rate of 11.0% is being assumed in addition to the 39.6%
federal tax rate, for a combined tax rate of 46.2%. With respect to the Tax-
Exempt New York Portfolio, the tax equivalent yields are being shown under two
scenarios. The first scenario assumes a federal marginal tax rate of 39.6% and
a New York State personal income tax rate of 7.594%, for a combined tax rate of
44.2%. The second scenario assumes a New York City personal income tax rate of
4.46% in addition to the above federal and New York, State tax rates, for a
combined tax rate of 46.9%. The combined tax rates assume full deductibility of
state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed 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 Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall
Street Journal.
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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 annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock or securities or certain
other investments held less than three months; and (c) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Portfolio's total gross assets is represented by cash and
cash items (including receivables), U.S. Government securities, securities of
other regulated investment companies and other securities limited, in respect of
any one issuer, to an amount not greater in value than 5% of the value of the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Portfolio's total assets
is invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Portfolio and engaged in the same, similar or
related trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Portfolio
distributes at least 90% of its investment company taxable income (generally all
of its net taxable income other than "net capital gain," which is the excess of
net long-term capital gain over net short-term capital loss) for such year and,
in the case of any Portfolio that earns tax-exempt interest, at least 90% of the
excess of the tax-exempt interest it earns over certain disallowed deductions.
A Portfolio will be subject to federal income tax at regular corporate rates on
any investment company taxable income or net capital gain that it does not
distribute for a taxable year. In order to avoid a non-deductible 4% federal
excise tax, each Portfolio must distribute (or be deemed
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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 over net short-term capital loss
are taxable to unitholders as long-term capital gain, regardless of the length
of time the units of a Portfolio have been held by such unitholders, and also
will not qualify for the corporate dividends-received deduction. A Portfolio's
net realized capital gains for a taxable year are computed by taking into
account realized capital losses, including any capital loss carryforward of that
Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Distributions paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any tax-exempt distributions attributable to interest on
certain "private activity bonds," if any, received by a Portfolio may constitute
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 and the corporate environmental tax. To
the extent that the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios invest in certain short-term instruments, including
repurchase agreements, the interest on which is not exempt from Federal income
tax, any distributions of income from such invest ments will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred
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<PAGE>
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 under the terms of applicable U.S. income
tax treaties in some cases, and each Portfolio intends to satisfy any procedural
requirements to qualify for benefits under these treaties. Although no
Portfolio anticipates that more than 50% of the value of its total assets at the
close of a taxable year will be composed of securities of foreign corporations,
if the 50% requirement were satisfied, a Portfolio could make an election under
Code Section 853 to permit its unitholders to claim a credit or deduction on
their federal income tax returns for their pro rata portion of qualified taxes
paid by that Portfolio in foreign countries. In the event such an election is
made, unitholders will be required to include their pro rata share of such taxes
in gross income and will be entitled to claim a foreign tax credit or deduction
with respect to such taxes, subject to certain limitations under the Code.
Unitholders who are precluded from taking such credits or deductions will
nevertheless be taxed on their pro rata share of the foreign taxes included in
their gross income, unless they are otherwise exempt from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service
all taxable distributions, except in the case of certain exempt unitholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate of
31% in the case of nonexempt unitholders who fail to furnish the Portfolio with
their taxpayer identification number and with certain certifications required by
the Internal Revenue Service or if the Internal Revenue Service or a broker
notifies a
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<PAGE>
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 Portfolio reasonably estimates
that at least 95% of its distributions will be exempt-interest dividends. The
Portfolios may refuse to accept an application that does not contain any
required taxpayer identification number or certification that the number
provided is correct or that the investor is an exempt recipient. If the
withholding provisions are applicable, any such distributions, whether taken in
cash or reinvested in units, will be reduced by the amounts required to be
withheld. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
Redemptions and exchanges of units will generally not result in taxable
gain or loss, but a loss may be recognized to the extent a CDSC is imposed on
the redemption or exchange of ILA Class B Units.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder on the unitholder's federal
income tax return. The Portfolios will inform unitholders of the federal income
tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios, the amounts that qualify as exempt-interest
dividends and any portions of such amounts that constitute tax preference items
under the federal alternative minimum tax. Unitholders who receive exempt-
interest dividends and have not held their units of the applicable Portfolio for
its entire taxable year may have designated as tax-exempt or as a tax preference
item a percentage of their distributions which is not exactly equal to a
proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in such Portfolio. Each
unitholder should consult his or her own tax advisor to determine the tax
consequences of an investment in a Portfolio in the unitholder's own state and
locality.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Unitholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities,
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<PAGE>
insurance companies and financial institutions. Each unitholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and non-
U.S. tax consequences of ownership of units of a Portfolio, including the
possibility that such a unitholder may be subject to a U.S. withholding tax at a
rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
certain distributions from a Portfolio and, if a current IRS Form W-8 or
acceptable substitute is not on file with the Portfolio, may be subject to
backup withholding on certain payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust and
its unitholders under such laws may differ from their treatment under Federal
income tax laws, and 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, intangibles tax consequences of investments by the
Portfolios in securities issued by the particular state or the U.S. Government
or its various agencies or instrumentalities, because many states (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 intangibles tax the value of the
units of such companies attributable to such obligations, subject to certain
state-specific requirements and/or limitations. See also the discussion below of
these applicable provisions in California and New York.
Assuming that each Portfolio qualifies as a regulated investment company
for federal income tax purposes, each Portfolio, as a series of a Massachusetts
business trust, will not be subject to any income, franchise or corporate excise
tax in Massachusetts. Provided that they qualify as regulated investment
companies and incur no federal income tax liability, the Portfolios may still be
subject to New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
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<PAGE>
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends attributable to interest on obligations the interest
on which is exempt from California personal income tax provided that the
Portfolio satisfies the requirement of California law that at least 50% of its
assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California Law. Distributions from the Tax-Exempt California Portfolio which are
attributable to sources other than those described in the second preceding
sentence will generally be taxable to such unitholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate unitholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by unitholders to purchase
or carry units of the Tax-Exempt California Portfolio will not be deductible for
California personal income tax purposes.
In addition, any loss realized by a unitholder of the Tax-Exempt California
Portfolio upon the sale of units held for six months or less may be disallowed
to the extent of any exempt-interest dividends received with respect to such
units. Moreover, any loss realized upon the redemption of units within six
months from the date of purchase of such units and following receipt of a long-
term capital gains distribution will be treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the re demption 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
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<PAGE>
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
Goldman Sachs Money Market Trust was established as a Massachusetts
business trust by a Declaration of Trust dated De cember 6, 1978 and reorganized
as part of Goldman Sachs Trust, a Delaware business trust by a Declaration of
Trust dated January 28, 1997. Each of the Portfolios became a series of the
Trust pursuant ot a reorganization which occurred on April 30,1997.
Each unitholder is deemed to have expressly assented and agreed to the
terms of the Declaration of Trust and is deemed to be party thereto. The
authorized capital of the Trust consists of an unlimited number of units of
beneficial interest. The Trustees have authority under the Declaration of Trust
to create and classify units of beneficial interest in separate series without
further action by unitholders. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series or portfolio of units into one or
more classes. The Trustees have authorized the issuance of three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have authorized a fourth class of
units, ILA Class B Units with respect to the Prime Obligations Portfolio.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio represents an equal proportionate
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interest in the assets belonging to that Portfolio. It is contemplated that most
units (other than ILA Class B 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
Units generally are only issued upon exchange from Class B Shares 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 are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. ILA Class B Units of the
Prime Obligations Portfolio bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.75% of the average daily net assets attributable
to ILA Class B Units. ILA Class B Units of the Prime Obligations Portfolio also
bear the cost of an Authorized Dealer Service Plan at an annual rate of up to
0.25% of the average daily net assets of the Prime Obligations Portfolio
attributable to ILA Class B Units.
It is possible that an institution or its 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 and ILA Class B Units
each have certain exclusive voting rights on matters relating to their
respective plans. Units of each class may be exchanged only for Units of the
same class in another Portfolio or, in the case of the Prime Obligations
Portfolio, shares of the corresponding class of certain other mutual funds
sponsored by Goldman Sachs. Except as described above, the four classes of
units are identical. Certain aspects of the Units may be altered, after advance
notice to unitholders,
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if it is deemed necessary in order to satisfy certain tax regulatory
requirements.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio is entitled to one vote per unit; however, separate votes
will be taken by each Portfolio or class (or by more than one Portfolio or class
voting as a single class if similarly affected) on matters affecting only that
individual Portfolio or class (or those affected Portfolios or classes) or as
otherwise required by law. Units are freely transferable and have no
preemptive, subscription or conversion rights. All units issued and outstanding
are fully paid and nonassessable. The Declaration of Trust provides for
unitholder voting only for the election or removal of one or more Trustees, if a
meeting is called for that purpose, and for certain other designated matters.
The Trust does not generally hold annual or other meetings of unitholders. The
units of the Portfolios have non-cumulative voting rights, which means that the
holders of more than 50% of the units voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the units voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Each Trustee serves until the next meeting of unitholders, if any,
called for the purpose of electing or reelecting such Trustee or successor to
such Trustee, and until the election and qualification of such successor, if
any, or until such Trustee sooner dies, resigns, retires or is removed by the
unitholders or two-thirds of the Trustees.
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were [insert names].
73
<PAGE>
As of April ___, 1997, the only holder of record of 5% or more of the
outstanding units of the Federal Portfolio was [insert names].
As of April ___, 1997, the only holder of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was [insert names].
UNITHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Delaware business
trust," which is the form in which many mutual funds are organized. Under
Delaware law, the unitholders of the Delaware trust are not generally subject to
liability for the debts or obligations of the trust. Similarly, Delaware law
provides that a Portfolio will not be liable for the debts or obligations of any
other series of the Delaware business 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 of the 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 of the Trust provides for
indemnification by the relevant Fund for any loss suffered by a unitholder as a
result of an obligation of the Portfolio. The Declaration of Trust of the 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.
On any matter submitted to a vote of the Unitholders of the Trust, all
Units shall be voted in the aggregate not by individual Portfolio or Class,
except (a) when required by the 1940 Act, Units shall be voted by individual
Portfolio or Class, and (b) when the Trustees have determined that the matter
affects the interests of only one or more Portfolios or Classes, then only the
Unitholders of all such Portfolios or Classes shall be entitled to vote. As
determined by the Trustees without the vote or consent of Unitholders, on any
matter submitted to a vote of Unitholders, either (i) each whole Unit shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Unit shall be entitled to a proportionate fractional vote or (ii)
each dollar of Net Asset Value (number of Units owned times Net Asset Value per
share of such Portfolio or Class, as applicable) shall be entitled to one vote
on any matter on which such Units are entitled to vote and each fractional
dollar amount shall be entitled to a proportionate fractional vote. There is no
cumulative voting in the election of Trustees.
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<PAGE>
In connection with the establishment of one or more Portfolios or Classes,
the Trustees establishing such Portfolios or Classes may appoint, to the extent
permitted by the Delaware Business Trust Act, separate Trustees with respect to
such Portfolios or Classes (the "Series Trustees"). Series Trustees may, but
are not required to, serve as Trustees of the Trust or any other Portfolio or
Class of the Trust. To the extent provided by the Trustees in the appointment
of Series Trustees, the Series Trustees may have, to the exclusion of any other
Trustee of the Trust,all the powers and authority of Trustees with respect to
such Portfolio or Class, but may have no power or authority with respect to any
other Portfolio or Class. Unitholders for a Portfolio or Class with respect to
which Series Trustees have been appointed shall only be entitled to vote in the
election of such Series Trustees.
Upon the vote of a majority of the Units outstanding and entitled to vote
of the Trust or of each Portfolio to be affected, the Trustees may (i) sell and
convey all or substantially all of the assets of all Portfolios or any affected
Portfolio to another Portfolio or to another entity which is an open-end
investment company as defined in the 1940 Act, or is a Portfolio thereof, for
adequate consideration, which may include the assumption of all outstanding
obligations, taxes and other liabilities, accrued or contingent, of the Trust or
any affected Portfolio, and which may include Units of or interests in such
Portfolio, entity, or Portfolio thereof; or (ii) at any time sell and convert
into money all or substantially all of the assets of all Portfolios or any
affected Portfolio. The Trustees may take any of the actions specified above
without obtaining the vote of a majority of the outstanding Units of the Trust
or any Portfolio if a majority of the Trustees determines, in their sole
discretion, that the continuation of the Trust of Portfolio is not in the best
interests of the Trust, such Portfolio, or their respective Unitholders. Also,
the Trustees may, without Unitholder approval unless such approval is required
by applicable federal law, (i) cause the Trust to merge or consolidate with or
into one or more entities, if the surviving or resulting entity is the Trust or
another open-end management investment company under the 1940 Act, or a
Portfolio thereof, (ii) cause the Units to be exchanged under or pursuant to any
state or federal statute to the extent permitted by law, or (iii) cause the
Trust to incorporate under the laws of Delaware or any other U.S. jurisdiction.
The Trustees may, without Unitholder approval, invest all or a portion of the
assets of any Portfolio, or dispose of all or a portion of the assets of any
Portfolio, and invest the proceeds of such disposition in interests issued by
one or more other investment companies registered under the Investment Company
Act. The Trustees may, without Unitholder approval unless such approval is
required by applicable law, cause a Portfolio that is organized in the
master/feeder fund structure to withdraw or redeem its assets from the master
fund and cause such Portfolio to invest its assets directly in securities and
other financial instrument or in another master fund.
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<PAGE>
ADMINISTRATION PLAN
The Trust, on behalf of each Portfolio, has adopted an administration plan
(the "Plan") with respect to the ILA Administration Units which authorizes the
Portfolios to compensate Service Organizations for providing certain account
administration services to their customers who are beneficial owners of such
units. Pursuant to the Plan, the Trust, on behalf of each Portfolio, enters into
agreements with Service Organizations which purchase ILA Administration Units on
behalf of their customers ("Service Agreements"). Under such Service
Agreements, the Service Organizations 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
Administration Units, (c) answer questions and handle correspondence from
customers regarding their accounts, (d) process customer orders to purchase,
redeem and exchange ILA Administration Units, and handle the transmission of
funds representing the customers' purchase price or redemption proceeds, and (e)
issue confirmations for transactions in units by customers. As compensation for
such services, the Trust on behalf of each Portfolio pays each Service
Organization an administration fee in an amount up to .15% (on an annualized
basis) of the average daily net assets of the ILA Administration Units of each
Portfolio attributable to or held in the name of such Service Organization for
its customers.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, with respect to each Portfolio, the amount of the
administration fees paid by each Portfolio then in existence to Service
Organizations was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $141,500 $262,293
Money Market Portfolio 223,420 265,715
Treasury Obligations
Portfolio 165,430 175,368
Treasury Instruments
Portfolio 110,355 57,915
Government Portfolio 94,196 206,144
Federal Portfolio 713,846 491,089
Tax-Exempt Diversified
Portfolio 103,673 146,224
Tax-Exempt California
Portfolio 600 1,938
Tax-Exempt New York
Portfolio 27,783 26,576
</TABLE>
76
<PAGE>
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in ILA Adminis tration Units. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment ad visers and other money
managers subject to the jurisdiction of the Securities and Exchange Commission,
the Department of Labor or State Securities Commissions, are urged to consult
legal advisers before investing fiduciary assets in ILA Administration Units.
In addition, under some state securities laws, banks and other financial
institutions purchasing ILA Administration Units on behalf of their customers
may be required to register as dealers.
The Plans were approved by the respective holders of ILA Administration
Units of each Portfolio on June 3, 1991. The Trustees of the Trust, including a
majority of the Trustees who are not interested persons of the Trust and who
have no direct or indirect financial interest in the operation of such Plans or
the related Service Agreements, most recently voted to approve the Plans and
Service Agreements at a meeting called for the purpose of voting on such Plan
and Service Agreements on April 23, 1997. They will remain in effect until
April 30, 1998 and continue in effect thereafter only if such continuance is
specifically approved annually by a vote of the Trustees in the manner described
above. A Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the ILA Administration
unitholders of the affected Portfolio, and all material amendments of the Plan
must also be approved by the Trustees in the manner described above. A Plan may
be terminated at any time by a majority of the Trustees as described above or by
vote of a majority of the outstanding ILA Administration Units of the affected
Portfolio. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Trustees as described above
or by a vote of a majority of the outstanding ILA Administration Units of the
affected Portfolio on not more than 60 days' written notice to any other party
to the Service Agreements. The Service Agreements shall terminate automatically
if assigned. So long as the Plans are in effect, the selection and nomination
of those Trustees who are not interested persons shall be committed to the
discretion of the Trust's Nominating Committee, which consists of all of the
non-interested members of the Board of Trustees. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Plans will
benefit the Portfolios and holders of ILA Administration Units of such
Portfolios. In the Trustees' quarterly review of the Plans and Service
Agreements, they will consider their continued appropriateness and the level of
compensation provided therein.
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<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
ILA SERVICE UNITS
ILA CLASS B 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 of Prime Obligations Portfolio and ILA Service
Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively
the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Portfolios'
investment adviser. Goldman Sachs serves as distributor and transfer agent to
the Portfolios.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority that
Goldman Sachs places on serving clients' interests. As Goldman Sachs clients,
Service Organizations, as defined below, will be assigned an Account
Administrator ("AA"), who is ready to help with questions concerning their
accounts. During business hours, Service Organizations can call their AA
through a toll-free number to place purchase or redemption orders or to obtain
Portfolio and account information. The AA can also answer
<PAGE>
inquiries about rates of return and portfolio composition/ holdings, and guide
Service Organizations through operational details. A Goldman Sachs client can
also utilize the SMART/SM/ personal computer software system which allows
Service Organizations to purchase and redeem units and also obtain Portfolio and
account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Prospectus relating to the ILA Service Units and ILA
Class B Units each dated May 1, 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............ 47
The Adviser, Distributor and
Transfer Agent................... 53
Portfolio Transactions........... 57
Net Asset Value.................. 58
Redemptions...................... 60
Calculation of Yield Quotations.. 61
Tax Information.................. 64
Organization and Capitalization.. 71
Custodian and Subcustodian....... 76
Independent Accountants.......... 76
Financial Statements............. 76
Service and Distribution Plans... 77
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 ownership of future interest payments,
principal payments or both on certain U.S. Government notes or bonds. Such
notes and bonds are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGR's"), and "Certificates of Accrual on
Treasury Securities" ("CATS"). Although custodial receipts are not considered
U.S. Government Securities for certain securities law purposes, they are
indirectly issued or guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities.
BANK AND CORPORATE OBLIGATIONS
Each 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
4
<PAGE>
specific merchandise, which are "accepted" by a bank, meaning, in effect, that
the bank unconditionally agrees to pay the face value of the instrument on
maturity. Fixed time deposits are bank obligations payable at a stated maturity
date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn
on demand by the investor, but may be subject to early withdrawal penalties
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 only
enter into repurchase agreements with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios' custodian
or subcustodian. The repurchase price may be higher than the purchase price,
the difference being income to the Portfolio, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Portfolio
together with the repurchase price on repurchase. In either case, the income to
the Portfolio is unrelated to the interest rate on the Obligation subject to the
repurchase agreement.
Repurchase agreements pose certain risks for all entities, including the
Portfolios, that utilize them. Such risks are not unique to the Portfolios but
are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by,
5
<PAGE>
among others, the means indicated below, but because of the inherent legal
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally for federal income tax purposes, a
repurchase agreement is deemed to be a loan from the Portfolio to the seller of
the Obligation. It is not clear whether for other purposes a court would
consider the Obligation purchased by the Portfolio subject to a repurchase
agreement as being owned by the Portfolio or as being collateral for a loan by
the Portfolio to the seller.
If in the event of bankruptcy or insolvency proceedings against the seller
of the Obligation, a court holds that the Portfolio does not have a perfected
security interest in the Obligation, the Portfolio may be required to return the
Obligation to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Portfolio would be at risk of losing some
or all of the principal and income involved in the transaction. To minimize
this risk, the Portfolios utilize custodians and subcustodians that the Adviser
believes follow customary securities industry practice with respect to
repurchase agreements, and the Adviser analyzes the creditworthiness of the
obligor, in this case the seller of the Obligation. But because of the legal
uncertainties, this risk, like others associated with repurchase agreements,
cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, 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, the Portfolio (other than the Treasury Instruments Portfolio),
together with other registered investment companies having advisory agreements
with the Adviser or any of its affiliates, may transfer uninvested cash balances
into a
6
<PAGE>
single joint account, the daily aggregate balance of which will be invested in
one or more repurchase agreements.
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 valua
tion, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against a
foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
The Prime Obligations and Money Market Portfolios may invest in asset-
backed and receivables-backed securities. Asset-backed and receivables-backed
securities represent participations in, or are secured by and payable from,
pools of assets such as motor vehicle installment sale contracts, installment
loan contracts, leases of various types of real and personal property,
receivables from revolving credit (credit card) agreements, corporate
receivables and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be guaranteed
up to certain amounts and for a certain time period by a letter of credit or a
pool insurance policy issued by a financial institution or other credit
enhancements may be present. The value of a Portfolio's investments in asset-
backed and receivables-backed securities may be adversely affected by prepayment
of the underlying obligations. In addition, the risk of prepayment may cause
the value of these investments to be more volatile than a Portfolio's other
investments.
Through the use of trusts and special purpose corporations, various types
of assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being
7
<PAGE>
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 these and other types of asset-backed
securities that may be developed in the future. This Statement of Additional
Information will be amended or supplemented as necessary to reflect the Prime
Obligations and Money Market Portfolios' intention to invest in asset-backed
securities with characteristics that are materially different from the
securities described in the preceding paragraph. However, the Portfolios will
generally not invest in an asset-backed security if the income received with
respect to its investment constitutes rental income or other income not treated
as qualifying income under the 90% test described in "Tax Information" below.
In general, the collateral supporting these securities is of shorter maturity
than mortgage loans and is less likely to experience substantial prepayments in
response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-backed
securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
8
<PAGE>
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
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transactions or through a combination of such approaches. The degree of credit
support provided for each issue is generally based on historical information
reflecting the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that anticipated or failure of the credit
support could adversely affect the value of or return on an investment in such a
security.
The availability of asset-backed securities may be affected by legislative
or regulatory developments. It is possible that such developments could require
the Prime Obligations and Money Market Portfolios to dispose of any then
existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or purchase
or sell securities on a forward commitment basis. These transactions involve a
commitment by the Portfolio to purchase or sell securities at a future date.
The price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be traded
over-the-counter.
A Portfolio will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities.
If deemed advisable as a matter of investment strategy, however, a Portfolio may
dispose of or negotiate a commitment after entering into it. A Portfolio also
may sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. The Portfolio may realize a
capital gain or loss in connection with these transactions, distributions from
which would be taxable to its unitholders. For purposes of determining a
Portfolio's average dollar weighted maturity, the maturity of
9
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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 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
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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 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 in strument 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
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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 secu rities are liquid. The Board of Trustees
may adopt guidelines and delegate to the Adviser the daily function of
determining and monitoring liquidity of restricted securities. The Board,
however, will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes, construction loan notes,
tax-exempt commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of the
issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other 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
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repayment of the notes. Tax-exempt commercial paper consists of short-term
unsecured promissory notes issued by a state or local government or an authority
or agency thereof. The Portfolios which invest in municipal obligations may
also acquire securities in the form of custodial receipts which evidence
ownership of future interest payments, principal payments or both on certain
state and local governmental and authority obligations when, in the opinion of
bond counsel, interest payments with respect to such custodial receipts are
excluded from gross income for federal income tax purposes, and in the case of
the Tax-Exempt California and Tax-Exempt New York Portfolios, exempt from
California and New York (city and state) personal income taxes, respectively.
Such obligations are held in custody by a bank on behalf of the holders of the
receipts. These custodial receipts are known by various names, including
"Municipal Receipts" ("MRs") and "Municipal Certificates of Accrual on Tax-
Exempt Securities" ("M-CATS"). There are a number of other types of notes
issued for different purposes and secured differently from those described
above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of public
projects including the construction or improvement of schools, highways and
roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit, and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
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
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local authority for capital projects are secured by annual lease rental payments
from the state or locality to the authority sufficient to cover debt service on
the authority's obligations.
Private activity bonds (a term that includes certain types of bonds the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds.
The serial bonds which the Portfolios may purchase are limited to short-term
serial bonds---those with original or remaining maturities of thirteen months or
less. The Portfolios may purchase long-term bonds provided that they have a
remaining maturity of thirteen months or less or, in the case of bonds called
for redemption, the date on which the redemption payment must be made is within
thirteen months. The Portfolios may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Portfolio's commitment to
put the bond back to the issuer at par at a designated time within thirteen
months and the issuer's commitment to so purchase the bond at such price and
time.
The Portfolios which invest in municipal obligations may invest in tender
option bonds. A tender option bond is a municipal obligation (generally held
pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, 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
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portfolio maturity of a Portfolio. The liquidity of a tender option bond is a
function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Consequently, tender option bonds are deemed
to be liquid unless, in the opinion of the Adviser, the credit quality of the
bond issuer and the financial institution is deemed, in light of the relevant
Portfolio's credit quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios intend to invest in tender option bonds the interest on
which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such tender option
bonds and thus will not be entitled to treat such interest as exempt from such
tax. A similar risk exists for certain other investments subject to puts or
similar rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. The Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios intend to manage their respective
portfolios in a manner designed to eliminate or minimize any adverse impact from
the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds,
there are a variety of hybrid and special types of municipal obligations as well
as numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New York
Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obliga tions,
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.
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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.
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
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such local obligations in the event of default in the absence of a specific
guarantee or pledge provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32
million represents over 12% of the total United States population and grew by
27% in the 1980s. While California's substantial population growth during the
1980's stimulated local economic growth and diversification and sustained a real
estate boom between 1984 and 1990, it has increased strains on California's
limited water resources and demands for government services and may impede
future economic growth. Population growth slowed since 1991 even while
substantial immigration has continued, due to a significant increase in
outmigration by California residents. Generally, the household incomes of new
residents have been substantially lower (and their education and welfare
utilization higher) than those of departing households, which may have a major
long-term socioeconomic and fiscal impact. However, with the California economy
improving, the recent net outmigration within the Continental U.S. is expected
to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs. The largest job losses have
been in Southern California, led by declines in the aerospace and construction
industries. Most of the losses were related to cuts in lost federal defense
spending.
Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, electronics, exports, transportation, recreation and services. This
growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels are expected to be reached in 1996. Unemployment in California is down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate.
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Orange County. On December 6, 1994, Orange County, California (the
-------------
"County"), together with its pooled investment funds (the "Pooled Funds") filed
for protection under chapter 9 of the federal Bankruptcy Code, after reports
that the Pooled Funds had suffered significant market losses in their
investments causing a liquidity crisis for the Pooled Funds and the County.
More than 180 other public entities, most but not all located in the County,
were also depositors in the Pooled Funds. The County estimated the Pooled
Funds' loss at about $1.8 billion, or 22% of its initial deposits of around $7.5
billion.
Many of the entities which kept money in the Pools (Pool Participants),
including the County, faced cash flow difficulties, suffered ratings
adjustments, and implemented cuts in personnel and programs. Some obligations
of the County and certain other Pool participants had technical defaults, or
were rescheduled. The Bankruptcy Court has approved a settlement agreement
between the County and most of the other Pool participants which provided about
80% (90% in the case of school districts) return of cash invested, with the
balance to be repaid over time, including from potential recoveries in lawsuits.
The County has implemented a financial recovery plan which includes significant
personnel cuts, and refinancing of current debts using new funds transferred to
the County from certain other local governments pursuant to special legislation
adopted in late 1995.
The State of California has no existing obligation with respect to any
outstanding obligations or securities of the County or any of the other
participating entities. However, the State may be obligated to ensure that
school districts have sufficient funds to operate or to maintain certain county
administered state programs. As of January 1, 1996, no school districts which
were Pool participants had become insolvent.
Constitutional and Statutory Limitations on Taxes and Appropriations
- --------------------------------------------------------------------
Limitations on Taxes. Certain California Instruments may be obligations
--------------------
of issuers which rely in whole or in part, directly or indirectly, on ad valorem
property taxes as a source of revenue. The taxing power of California local
governments and districts is limited by Article XIIIA of the California
constitution, also known as "Proposition 13." Briefly, Article XIIIA limits to
1% of full cash value the rate of ad valorem property taxes on real property and
generally restricts the reassessment of property to 2% per year, except upon new
construction or change of ownership (subject to a number of 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
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earlier), subject to certain adjustments. This system has resulted in widely
varying amounts of tax on similarly situated properties. Several lawsuits have
been filed challenging the acquisition-based assessment system of Proposition
13, and on June 18, 1992 the U.S. Supreme Court announced a decision upholding
Proposition 13.
Article XIIIA prohibits local governments from raising revenues through ad
valorem property taxes above the 1% limit; it also requires voters of any
governmental unit to give two-thirds approval to levy any "special tax". Court
decisions, however, allowed non-voter approved levy of "general taxes" which
were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB appropriations
limit are (1) the debt service cost of bonds issued or authorized prior to
January 1, 1979, or subsequently authorized by the voters, (2) appropriations
arising from certain emergencies declared by the Governor, (3) appropriations
for certain capital outlay projects, (4) appropriations by the State of post
1989 increases in gasoline taxes and vehicle weight fees, and (5) appropriations
made in certain cases of emergency.
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.
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"Excess" revenues are measured over a two year cycle. Local governments
must return any excess to taxpayers by rate reductions. The State must refund
50% paid to schools and community colleges. With more liberal annual
adjustment factors since 1988, and depressed revenues since 1990 because of the
recession, few governments, including the State, are currently operating near
their spending limits, but this condition may change over time. Local
governments may by voter approval exceed their spending limits for up to four
years.
A 1986 initiative statute, called "Proposition 62," imposed additional
limits on local governments, by requiring either majority or 2/3 voter approval
for any increases in "general taxes" or "special taxes," respectively (other
than property taxes, which are unchangeable). Court decisions had struck down
most of Proposition 62 and many local governments, especially cities, had
enacted or raised local "general taxes" without voter approval. In September,
1995, the California Supreme Court overruled the prior cases, and upheld the
constitutionality of Proposition 62. Many aspects of this decision remain
unclear (such as its impact on charter (home rule) cities, and whether it will
have retroactive effect), but its future effect will be to further limit the
fiscal flexibility of many local governments.
Because of the complex nature of Articles XIIIA and XIIIB of the California
Constitution, the ambiguities and possible inconsistencies of their terms, and
the impossibility of predicting future appropriations or changes in population
and cost of living, and the probability of continuing legal challenges, it is
not currently possible to determine fully the impact of Article XIIIA or Article
XIIIB on California Instruments. It is not presently possible to predict the
outcome of any pending litigation with respect to the ultimate scope, impact or
constitutionality of either Article XIIIA or Article XIIIB, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on outstanding
----------
general obligation bonds is the second charge to the General Fund after support
of the public school system and public institutions of higher education. Total
outstanding general obligation bonds and lease purchase debt of California
increased from $9.4 billion at June 30, 1987 to $23.8 billion at February 1,
1996. In FY1994-95, debt service on general obligation bonds and lease purchase
debt was approximately 5.3% of General Fund revenues. State voters approved
$5.0 billion of new bond authorizations on the March 26, 1996 ballot, and
additional bonds are expected to be placed on the November 5, 1996 ballot.
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Recent Financial Results. The principal sources of General Fund revenues
------------------------
in 1994-1995 were the California personal income tax (43% of total revenues),
the sales tax (34%), bank and corporation taxes (13%), and the gross premium tax
on insurance (3%). California maintains a Special Fund for Economic
Uncertainties, derived from General Fund revenues, as a reserve to meet cash
needs of the General Fund.
General. Throughout the 1980s, California state spending increased rapidly
-------
as California's population and economy also grew rapidly, including increased
spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Since the start of 1990-91 Fiscal Year, California has faced adverse
economic, fiscal and budget conditions. The economic recession seriously
affected California's tax revenues. It also caused increased expenditures for
health and welfare programs. California is also facing a structural imbalance
in its budget with the largest programs supported by the General Fund
(education, health, welfare and corrections) growing at rates higher than the
growth rates for the principal revenue sources of the General Fund. These
structural concerns will be exacerbated in coming years by the expected need to
substantially increase capital and operating funds for corrections as a result
of a "Three Strikes" law enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the late
--------------
1980's until 1992-93, the State had a period of nearly chronic budget imbalance,
with expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the SFEU
approaching $2.8 billion at its peak at June 30, 1993. Starting in the 1990-91
Fiscal Year and for each year thereafter, each budget required multibillion
dollar actions to bring projected revenues and expenditures into balance and to
close large "budget gaps" which were identified. The Legislature and Governor
eventually agreed on a number of different steps to produce Budget Acts in the
Years 1991-92 to 1994-95, including:
. significant cuts in health and welfare program expenditures;
. 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
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some other districts to local school districts, thereby reducing state funding
for schools;
. reduction in growth of support for higher education programs, coupled
with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget), most
of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to large
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so as two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.
The combination of stringent budget actions cutting State expenditures,
and the turnaround of the economy by late 1993, finally led to the restoration
of positive financial results. While General Fund revenues and expenditures
were essentially equal in FY 1992-93 (following two years of excess expenditures
over revenues), the General Fund had positive operating results in FY 1993-94
and 1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995. The 1996-97 Governor's Budget projects complete
elimination of the deficit by June 30, 1996.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the 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.
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The State's cash shortfalls also required the State Controller to issue
revenue anticipation warrants maturing in the following fiscal year in order to
pay the State's continuing obligations. The State was forced to rely
increasingly on external debt markets to meet its cash needs, as a succession of
notes and warrants (both forms of short-term cash flow financing) were issued in
the period from June 1992 to July 1994, often needed to pay previously-maturing
notes or warrants. These borrowings were used also in part to spread out the
repayment of the accumulated budget deficit over the end of the fiscal year.
The State issued $7.0 billion of short-term debt in July 1994 to meet its
cash flow needs and to finance the deferral of part of its accumulated deficit
to the 1995-96 fiscal year. In order to assure repayment of $4.0 billion of
this borrowing which matures on April 25, 1996, the State enacted legislation
(the "Trigger Law") which could have led to automatic, across-the-board budget
cuts in General Fund expenditures if cash flow projections made at certain times
deteriorated from estimates made in July 1994 when the borrwings were made.
However, the State's improved finances as a result of the economic recovery have
made such action unnecessary.
Current Budget. For the first time in four years, the State entered the
--------------
1995-96 fiscal year with strengthening revenues based on an improving economy.
The major feature of the Governor's proposed Budget, a 15% phased cut in
personal income and business taxes, was rejected by the Legislature.
The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projected General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
years. Expenditures were budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance's most recent projections are that, after repaying the
last of the carryover budget deficit, there would be a positive balance of about
$50 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1996.
The Department of Finance projected cash flow borrowings in the 1995-96
Fiscal Year would be the smallest in many years, comprising $2.0 billion of
notes issued in April, 1996, and maturing on June 28, 1996. With full payment
of $4 billion of revenue anticipation warrants on April 25, 1996, the Department
predicts no further need for borrowing over the end of the fiscal year.
The principal features of the 1995-96 Budget Act, in addition to those
noted above, were additional cuts in health and welfare expenditures (some of
which are subject to approvals or waivers by the federal government); assumed
further federal aid for illegal immigrant costs; and an increase in per-pupil
funding for public schools and community colleges, the first such significant
increase in four years.
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The Governor's Proposed Budget for the 1996-97 Fiscal Year (the Governor's
Budget), released on January 10, 1996, updated financial projections for the
current year. Although improved economic conditions will result in
substantially larger revenues, these will be offset by greater expenditures,
with no significant change in the projected year-end fund balance.
The Governor's Budget proposes General Fund spending in 1996-97 of $45.2
billion, with revenues of $45.6 billion, leaving a budget reserve in the SFEU of
about $400 million. The Governor has again proposed a three-year phased 15%
reduction of personal income and corporate tax rates. The Governor's Budget
also assumed implementation of certain previously-approved cuts in health and
welfare costs, adoption of further cuts in welfare payments, the adoption of
federal welfare reform, and receipt of new federal aid for illegal immigrant
costs. As of April, 1996, many of these federal actions had not taken place,
leaving the the Governor's Budget plan with larger expenditures than
anticipated, which will have to be addressed in the final budget action. The
Governor's Budget proposed increased expenditures for K-12 school aid, higher
education, and corrections. The Governor's Budget projected annual cash flow
borrowing of about $3.2 billion.
Bond Ratings. State general obligation bond ratings were reduced in July,
------------
1994 to "A1" by Moody's Investors Services, Inc. ("Moody's") and "A" by Standard
& Poor's Ratings Group ("S&P"). Both of these ratings were reduced from "AAA"
levels which California held until late 1991. There can be no assurance that
such ratings will be maintained in the future. It should be noted that the
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and that there is no obligation on the part of California to make
payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal proceedings
------------------
(described in California's recent financial statements) that, if decided against
California, may require California to make significant future expenditures or
may substantially impair revenues. Trial courts have recently entered tentative
decisions or injunctions which would overturn several parts of the state's
recent budget compromises. The matters covered by these lawsuits include a
deferral of payments by California to the Public Employees Retirement System,
reductions in welfare payments and the use of certain cigarette tax funds for
health costs. All of these cases are subject to 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
24
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of the State of California that issue municipal obligations, some of which may
be conduit revenue obligations payable from payments from private borrowers.
These entities are subject to various economic risks and uncertainties, and the
credit quality of the securities issued by them may vary considerably from the
credit quality of obligations backed by the full faith and credit of the State
of California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. At least one rural county
(Butte) publicly announced that it might enter bankruptcy proceedings in August
1990, although such plans were put off after the Governor approved legislation
to provide additional funds for the county. Other counties have also indicated
that their budgetary condition is extremely grave. At the start of the 1995-96
fiscal year, Los Angeles County, the largest in the State, faced a nominal $1.2
billion gap in its $12 billion budget, half of which was in the County health
care system. The gaps were closed only with significant cuts in services and
personnel, particularly in the health care system, federal aid, and transfer of
some funds from other local governments to the County pursuant to special
legislation. The County's debt was downgraded by Moody's and S&P in the summer
of 1995.
Assessment Bonds. California Instruments which are assessment bonds may be
----------------
adversely affected by a general decline in real estate values or a slowdown in
real estate sales
25
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activity. In many cases, such bonds are secured by land which is undeveloped
at the time of issuance but anticipated to be developed within a few years after
issuance. In the event of such reduction or slowdown, such development may not
occur or may be delayed, thereby increasing the risk of a default on the bonds.
Because the special assessments or taxes securing these bonds are not the
personal liability of the owners of the property assessed, the lien on the
property is the only security for the bonds. Moreover, in most cases the issuer
of these bonds is not required to make payments on the bonds in the event of
delinquency in the payment of assessments or taxes, except from amounts, if any,
in a reserve fund established for the bonds.
California Long-Term Lease Obligations. Certain California long-term lease
--------------------------------------
obligations, though typically payable from the general fund of the municipality,
are subject to "abatement" in the event the facility being leased is unavailable
for beneficial use and occupancy by the municipality during the term of the
lease. Abatement is not a default, and there may be no remedies available to
the holders of the certificates evidencing the lease obligation in the event
abatement occurs. The most common cases of abatement are failure to complete
construction of the facility before the end of the period during which lease
payments have been capitalized and uninsured casualty losses to the facility
(e.g. due to earthquake). In the event abatement occurs with respect to a lease
obligation, lease payments may be interrupted (if all available insurance
proceeds and reserves are exhausted) and the certificates may not be paid when
due.
Several years ago the Richmond Unified School District (the "District")
entered into a lease transaction in which certain existing properties of the
District were sold and leased back in order to obtain funds to cover operating
deficits. Following a fiscal crisis in which the District's finances were taken
over by a state receiver (including a brief period under bankruptcy court
protection), the District failed to make rental payments on this lease,
resulting in a lawsuit by the Trustee for the Certificate of Participation
holders, in which the State of California was a named defendant (on the grounds
that it controlled the District's finances). One of the defenses raised in
answer to this lawsuit was the invalidity of the District's lease. The trial
court upheld the validity of the lease, and the case was subsequently settled.
Any ultimate judgment in any future case against the position taken by the
Trustee may have adverse implications for lease transactions of a similar nature
by other California entities.
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),
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including risks related to the policy of awarding exclusive contracts to
certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that all
revenues produced by a tax rate increase go directly to the taxing entity which
increased such tax rate to repay that entity's general obligation indebtedness.
As a result, redevelopment agencies (which typically are the issuers of tax
allocation securities) no longer receive an increase in tax increment when taxes
on property in the project area are increased to repay voter-approved bonded
indebtedness.
The effect of these various constitutional and statutory changes upon the
ability of California municipal securities issuers to pay interest and principal
on their obligations remains unclear. Furthermore, other measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future. Legislation has been or may be introduced
which would modify existing taxes or other revenue raising measures or which
either would further limit or, alternatively, would increase the abilities of
state and local governments to impose new taxes or increase existing taxes. It
is not presently possible to predict the extent to which any such legislation
will be enacted. Nor is it presently possible to determine the impact of any
such legislation on California Instruments in which the California Portfolio may
invest, future allocations of state revenues to local governments or the
abilities of state or local governments to pay the interest on, or repay the
principal of, such California Instruments.
Substantially all of California is within an active geologic region subject
to major seismic activity. Northern California in 1989 and Southern California
in 1994 experienced major earthquakes causing billions of dollars in damages.
The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the California Portfolio could be affected by
an interruption of revenues because of damaged facilities, or, consequently,
income tax deductions for casualty losses or property tax assessment reductions.
Compensatory financial assistance could be
27
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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 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,
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.
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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 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
29
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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 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
30
<PAGE>
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 no assurances that the State Legislature will
enact welfare reform proposals as submitted by the Governor and as required
under federal law.
31
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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.
DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing
32
<PAGE>
(i.e., borrowing for more than one year) unless the borrowing is authorized in a
---
specific amount for a single work or purpose by the Legislature and approved by
the voters. There is no limitation on the amount of long-term general obligation
debt that may be so authorized and subsequently incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except
33
<PAGE>
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
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million in certificates of participation during the State's 1996-97 fiscal year
for equipment purchases. The 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.
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Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided against the State. As a result, the
Comptroller 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 of New York, on January 21, 1994, the
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State entered into a settlement agreement 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
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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, 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 commit ments 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 arrange ments 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
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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
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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, 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
Legisla ture 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 Portfolios 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 authoriz ing 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
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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 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
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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 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
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$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 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.
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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 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.
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The Portfolios value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments is
expected to approximate such amortized cost. No value is assigned to the standby
commitments for purposes of determining a Portfolio's net asset value. Since the
value of a standby commitment is dependent on the ability of the standby
commitment writer to meet its obligation to repurchase, the policy of each
Portfolio that may enter into standby commitment transactions is to enter into
such transactions only with banks, brokers or dealers which represent a minimal
risk of default. The duration of standby commitments will not be a factor in
determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt California Portfolio were series, has received a ruling from the
Internal Revenue Service to the effect that it is considered the owner of the
municipal obligations subject to standby commitments so that the interest on
such instruments will be tax-exempt income to it. The Internal Revenue Service
has subsequently announced that it will not ordinarily issue advance ruling
letters as to the identity of the true owner of property in cases involving the
sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be
purchased by either the seller or a third party. Each of the Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intends to
take the position that it is the owner of any municipal obligations acquired
subject to a standby commitment or acquired or held with certain other types of
put rights and that its distributions of tax-exempt interest earned with respect
to such municipal obligations will be tax-exempt for its unitholders. There is
no assurance that standby commitments will be available to a Portfolio nor has
any Portfolio assumed that such commitments will continue to be available under
all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Portfolio
without the approval of the majority of outstanding voting securities of that
Portfolio (which, under the Investment Company Act and the rules thereunder and
as used in the Prospectus and this Statement of Additional Information, means
the lesser of (1) 67% of the units of that Portfolio present at a meeting if the
holders of more than 50% of the outstanding units of that Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding units of that
Portfolio). Investment restrictions that involve a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after, and is caused by, an
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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 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 that (a) 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
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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 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 securities of a
single open-end investment company or series thereof with substantially the same
fundamental investment objectives, restrictions and policies as the
Portfolio.
In addition to the fundamental policies mentioned above, the Board of
Trustees of the Trust has adopted the following non-fundamental policy which may
be changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on behalf of any Portfolio:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a Portfolio'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.
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(c) purchase additional securities if the Portfolio's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(d) make short sales of securities, except short sales against the
box.
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 either First or Second Tier securities. Portfolio
diversification. The Prime Obligations, Government, Treasury Obligations, Money
Market, Federal and Treasury Instruments Portfolios may not invest more than 5%
of their total assets (taken at amortized cost) 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. 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 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
46
<PAGE>
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, au thorities 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 and
NY, NY 10019 Chief Financial Officer, Coty
Inc. (since April 1996);
President, ABN Associates
(since June 1994) Retired.
Senior Vice President of Scott
Paper until June 1994 Company;
Director of Arkwright Mutual
Insurance Company; Trustee of
International House of
Philadelphia; Member of
Cornell University Council;
Trustee of the Walnut Street
Theater.
*David B. Ford, 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 Goldman Sachs
Asset Management (since
December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachu-
setts Financial Services
(prior thereto).
</TABLE>
47
<PAGE>
<TABLE>
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 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
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation
Bryn Mawr, PA 19010 (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 York, 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).
</TABLE>
48
<PAGE>
<TABLE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One Northfield Plaza 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 Private 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, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs Funds
Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Manage-
New York, NY ment (since February 1994);
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, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- --------------------
<S> <C> <C>
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and
Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset Management
(since 1993); Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst, Prudential
Insurance (1991-1993).
</TABLE>
Each interested Trustee and officer holds comparable positions with certain
other investment companies of which Goldman Sachs, GSAM or an affiliate thereof
is the investment adviser, administrator and/or distributor. As of April ___,
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.
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period one-year ended
December 31, 1996:
51
<PAGE>
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement from Goldman
Benefits Sachs Mutual
Aggregate Accrued as Funds
Compensation Part of (including
from the Portfolio's the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $ $0 $
Ashok N. Bakhru $ $0 $
Marcia L. Beck*** $ $0 $
David B. Ford $ $0 $
Alan A. Shuch $ $0 $
Jackson W. Smart $ $0 $
William H. Springer $ $0 $
Richard P. Strubel $ $0 $
- --------------
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ___ mutual funds,
including the nine portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
52
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, taxes, interest,
brokerage and litigation, indemnification and other extraordinary expenses) of
each Portfolio, on an annualized basis, to .43% of the average daily net assets
of that Portfolio. The amount of such reductions or limits, if any, 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 not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Money
Market, Federal, Treasury Instruments, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios' annual total operating expenses to (excluding fees of Service
Organizations).__%, .__%, .__%, .__% and .__%, respectively, of average daily
net assets and for each other Portfolio to .41% of average daily net assets.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the 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
53
<PAGE>
cost of legal and certain accounting services rendered by employees of Goldman
Sachs with respect to the 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 ex penses 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>
Prime Obligations Portfolio $6,728,074 $9,135,344
Money Market Portfolio 2,618,275 2,663,551
Treasury Obligations Portfolio 3,206,490 3,545,307
Treasury Instruments Portfolio 1,079,236 687,965
Government Portfolio 3,259,056 4,804,362
Federal Portfolio 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,030,447 867,058
Tax-Exempt New York Portfolio 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:
54
<PAGE>
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Money Market Portfolio $ 436,325 $ 443,925
Treasury Instruments Portfolio 1,438,992 917,292
Federal Portfolio 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,518,129 1,749,116
Tax-Exempt New York Portfolio 109,464 123,050
</TABLE>
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 expense would have
been incurred for the periods indicated:
<TABLE>
<CAPTION>
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
Prime Obligations Portfolio $ 347,317 $ 635,085
Money Market Portfolio 135,715 301,326
Treasury Obligations Portfolio 203,882 371,456
Treasury Instruments Portfolio 223,652 150,525
Government Portfolio 276,785 526,310
Federal Portfolio 302,153 326,417
Tax-Exempt Diversified Portfolio 239,829 217,296
Tax-Exempt California Portfolio 19,625 34,612
Tax-Exempt New York Portfolio 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
55
<PAGE>
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 re search team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service costs,
liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs also serves as the Portfolios' transfer agent. Goldman Sachs provides
customary transfer agency services to the Portfolios, including the handling of
unitholder communications, the processing of unitholder transactions, the
maintenance of unitholder account records, payment of dividends and
distributions and related functions. For these services, Goldman Sachs receives
.04% (on an annualized basis) of the average daily net assets with respect to
each Portfolio (other than the Prime Obligations Portfolio). With respect to
the Prime Obligations Portfolio, Goldman Sachs is entitled to receive a fee from
the Portfolio equal to the classes proportionate share of the total transfer
agency fees borne by the Portfolio, which are equal to $12,000 per year plus
$7.50 per account, together with out-of-pocket expenses (including those out of
pocket expenses payable to servicing agents) applicable to ILA Class B Units and
.04% of the average daily net assets of the other classes of the Prime
Obligations Portfolio. Goldman Sachs may from time to time agree that the fee
it would otherwise be entitled to receive under its transfer agency agreement
will be reduced.
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>
<S> <C> <C>
12/31/96 12/31/95 12/31/94
Prime Obligations Portfolio $ 768,923 $1,044,039
Money Market Portfolio 349,060 355,140
Treasury Obligations Portfolio 366,456 405,178
Treasury Instruments Portfolio 287,798 183,457
Government Portfolio 372,463 549,070
Federal Portfolio 908,708 679,243
Tax-Exempt Diversified Portfolio 607,252 699,643
Tax-Exempt California Portfolio 117,765 99,092
Tax-Exempt New York Portfolio 39,298 32,139
</TABLE>
56
<PAGE>
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 ___, 1996, Goldman
Sachs and its consolidated subsidiaries had assets of approximately $____
billion and partners' capital of $____ billion. Goldman Sachs became registered
as an investment adviser in 1981. As of March ___, 1997, Goldman Sachs, together
with its affiliates, acted as investment adviser, administrator or distributor
for approximately $____ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all other
accounts managed by GSAM for execution with many firms. GSAM uses its best
efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread or commission, if any. Securities purchased and
sold by the Portfolios are generally traded in the over-the-counter market on a
net basis (i.e., 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.
57
<PAGE>
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in view
of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for more
than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed to be equitable to each. It is recognized that in
some cases this system could have a detrimental effect on the price or volume of
the security in a particular transaction as far as a Portfolio is concerned.
Each Fund believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker/dealers: [insert names].
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, or their parents ($ in thousands): [insert names].
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): [insert names].
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): [insert names].
58
<PAGE>
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, President's Day, Good
Friday, Memorial Day, the Fourth of July, Labor Day, Columbus Day, Veteran's
Day, Thanksgiving Day and Christmas Day.
Each Portfolio's securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $ 1.00 per
unit, which the Board of Trustees has determined to be in the best interest of
the Portfolios and their unitholders. This method involves valuing a security
at cost on the date of acquisition and thereafter assuming a constant accretion
of a discount or amortization of a premium to maturity, regardless of the impact
of fluctuating interest rates on the market value of the instrument. While this
method provides 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 in vestments 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
59
<PAGE>
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."
The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B Units (Prime Obligations
Portfolio only) will be subject to different expense structures (see
"Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of units of a Portfolio and
may postpone payment for any period: (i) during which the New York Stock
Exchange is closed other than customary weekend and holiday closings or during
which trading on the New York Stock Exchange is restricted, (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable, (iii) as the SEC may by order permit for the
protection of the unitholders of the Trust or (iv) at any other time when the
Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Portfolio's units.
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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.
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) - 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.
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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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio:
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio:
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
- -------------------------
</TABLE>
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations 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 ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
ILA Class B Units ____ ____ N/A
Money Market Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Obligations Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Treasury Instruments Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Government Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Federal Portfolio
ILA Units ____ ____ N/A
ILA Administration Units ____ ____ N/A
ILA Service Units ____ ____ N/A
Tax-Exempt Diversified Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units ____ ____ ____
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Tax-Exempt California Portfolio
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
Tax-Exempt New York Portfolio*
ILA Units ____ ____ ____
ILA Administration Units ____ ____ ____
ILA Service Units** ____ ____ ____
</TABLE>
- -------------------------
* ____%, ____% and ____% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York City taxes into account.
** Assuming such Units had been outstanding and are subject to maximum
administration or service fees.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, a California State
personal income tax rate of 11.0% is being assumed in addition to the 39.6%
federal tax rate, for a combined tax rate of 46.2%. With respect to the Tax-
Exempt New York Portfolio, the tax equivalent yields are being shown under two
scenarios. The first scenario assumes a federal marginal tax rate of 39.6% and
a New York State personal income tax rate of 7.594%, for a combined tax rate of
44.2%. The second scenario assumes a New York City personal income tax rate of
4.46% in addition to the above federal and New York, State tax rates, for a
combined tax rate of 46.9%. The combined tax rates assume full deductibility of
state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed 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 Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall
Street Journal.
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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 annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock or securities or certain
other investments held less than three months; and (c) diversify its holdings
so that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Portfolio's total gross assets is represented by cash and
cash items (including receivables), U.S. Government securities, securities of
other regulated investment companies and other securities limited, in respect of
any one issuer, to an amount not greater in value than 5% of the value of the
Portfolio's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Portfolio's total assets
is invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Portfolio and engaged in the same, similar or
related trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Portfolio
distributes at least 90% of its investment company taxable income (generally all
of its net taxable income other than "net capital gain," which is the excess of
net long-term capital gain over net short-term capital loss) for such year and,
in the case of any Portfolio that earns tax-exempt interest, at least 90% of the
excess of the tax-exempt interest it earns over certain disallowed deductions.
A Portfolio will be subject to federal income tax at regular corporate rates on
any investment company taxable income or net capital gain that it does not
distribute for a taxable year. In order to avoid a non-deductible 4% federal
excise tax, each Portfolio must distribute (or be deemed
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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 over net short-term capital loss
are taxable to unitholders as long-term capital gain, regardless of the length
of time the units of a Portfolio have been held by such unitholders, and also
will not qualify for the corporate dividends-received deduction. A Portfolio's
net realized capital gains for a taxable year are computed by taking into
account realized capital losses, including any capital loss carryforward of that
Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Distributions paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any tax-exempt distributions attributable to interest on
certain "private activity bonds," if any, received by a Portfolio may constitute
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 and the corporate environmental tax. To
the extent that the Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt
New York Portfolios invest in certain short-term instruments, including
repurchase agreements, the interest on which is not exempt from Federal income
tax, any distributions of income from such invest ments will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred
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<PAGE>
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 under the terms of applicable U.S. income
tax treaties in some cases, and each Portfolio intends to satisfy any procedural
requirements to qualify for benefits under these treaties. Although no
Portfolio anticipates that more than 50% of the value of its total assets at the
close of a taxable year will be composed of securities of foreign corporations,
if the 50% requirement were satisfied, a Portfolio could make an election under
Code Section 853 to permit its unitholders to claim a credit or deduction on
their federal income tax returns for their pro rata portion of qualified taxes
paid by that Portfolio in foreign countries. In the event such an election is
made, unitholders will be required to include their pro rata share of such taxes
in gross income and will be entitled to claim a foreign tax credit or deduction
with respect to such taxes, subject to certain limitations under the Code.
Unitholders who are precluded from taking such credits or deductions will
nevertheless be taxed on their pro rata share of the foreign taxes included in
their gross income, unless they are otherwise exempt from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service
all taxable distributions, except in the case of certain exempt unitholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate of
31% in the case of nonexempt unitholders who fail to furnish the Portfolio with
their taxpayer identification number and with certain certifications required by
the Internal Revenue Service or if the Internal Revenue Service or a broker
notifies a
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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 Portfolio reasonably estimates
that at least 95% of its distributions will be exempt-interest dividends. The
Portfolios may refuse to accept an application that does not contain any
required taxpayer identification number or certification that the number
provided is correct or that the investor is an exempt recipient. If the
withholding provisions are applicable, any such distributions, whether taken in
cash or reinvested in units, will be reduced by the amounts required to be
withheld. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
Redemptions and exchanges of units will generally not result in taxable
gain or loss, but a loss may be recognized to the extent a CDSC is imposed on
the redemption or exchange of ILA Class B Units.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder on the unitholder's federal
income tax return. The Portfolios will inform unitholders of the federal income
tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios, the amounts that qualify as exempt-interest
dividends and any portions of such amounts that constitute tax preference items
under the federal alternative minimum tax. Unitholders who receive exempt-
interest dividends and have not held their units of the applicable Portfolio for
its entire taxable year may have designated as tax-exempt or as a tax preference
item a percentage of their distributions which is not exactly equal to a
proportionate share of the amount of tax-exempt interest or tax preference
income earned during the period of their investment in such Portfolio. Each
unitholder should consult his or her own tax advisor to determine the tax
consequences of an investment in a Portfolio in the unitholder's own state and
locality.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Unitholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities,
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insurance companies and financial institutions. Each unitholder who is not a
U.S. person should consult his or her tax adviser regarding the U.S. and non-
U.S. tax consequences of ownership of units of a Portfolio, including the
possibility that such a unitholder may be subject to a U.S. withholding tax at a
rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
certain distributions from a Portfolio and, if a current IRS Form W-8 or
acceptable substitute is not on file with the Portfolio, may be subject to
backup withholding on certain payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of the Trust and
its unitholders under such laws may differ from their treatment under Federal
income tax laws, and 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, intangibles tax consequences of investments by the
Portfolios in securities issued by the particular state or the U.S. Government
or its various agencies or instrumentalities, because many states (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 intangibles tax the value of the
units of such companies attributable to such obligations, subject to certain
state-specific requirements and/or limitations. See also the discussion below of
these applicable provisions in California and New York.
Assuming that each Portfolio qualifies as a regulated investment company
for federal income tax purposes, each Portfolio, as a series of a Massachusetts
business trust, will not be subject to any income, franchise or corporate excise
tax in Massachusetts. Provided that they qualify as regulated investment
companies and incur no federal income tax liability, the Portfolios may still be
subject to New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
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Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends attributable to interest on obligations the interest
on which is exempt from California personal income tax provided that the
Portfolio satisfies the requirement of California law that at least 50% of its
assets at the close of each quarter of its taxable year be invested in such
obligations and properly designates such exempt-interest dividends under
California Law. Distributions from the Tax-Exempt California Portfolio which are
attributable to sources other than those described in the second preceding
sentence will generally be taxable to such unitholders as ordinary income.
Moreover, California legislation which incorporates Subchapter M of the Code
provides that capital gain dividends may be treated as long-term capital gains.
Such gains are currently subject to personal income tax at ordinary income tax
rates. Capital gains that are retained by the Portfolio will be taxed to that
Portfolio, and California residents will receive no California personal income
tax credit for such tax. Distributions other than exempt-interest dividends are
includable in income subject to the California alternative minimum tax.
Distributions from investment income and long-term and short-term capital
gains will generally not be excluded from taxable income in determining
California corporate franchise taxes for corporate unitholders and will be
treated as ordinary dividend income for such purposes. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by unitholders to purchase
or carry units of the Tax-Exempt California Portfolio will not be deductible for
California personal income tax purposes.
In addition, any loss realized by a unitholder of the Tax-Exempt California
Portfolio upon the sale of units held for six months or less may be disallowed
to the extent of any exempt-interest dividends received with respect to such
units. Moreover, any loss realized upon the redemption of units within six
months from the date of purchase of such units and following receipt of a long-
term capital gains distribution will be treated as long-term capital loss to the
extent of such long-term capital gains distribution. Finally, any loss realized
upon the re demption 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
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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
Goldman Sachs Money Market Trust was established as a Massachusetts
business trust by a Declaration of Trust dated De cember 6, 1978 and reorganized
as part of Goldman Sachs Trust, a Delaware business trust by a Declaration of
Trust dated January 28, 1997. Each of the Portfolios became a series of the
Trust pursuant ot a reorganization which occurred on April 30,1997.
Each unitholder is deemed to have expressly assented and agreed to the
terms of the Declaration of Trust and is deemed to be party thereto. The
authorized capital of the Trust consists of an unlimited number of units of
beneficial interest. The Trustees have authority under the Declaration of Trust
to create and classify units of beneficial interest in separate series without
further action by unitholders. The Declaration of Trust further authorizes the
Trustees to classify or reclassify any series or portfolio of units into one or
more classes. The Trustees have authorized the issuance of three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have authorized a fourth class of
units, ILA Class B Units with respect to the Prime Obligations Portfolio.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio represents an equal proportionate
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interest in the assets belonging to that Portfolio. It is contemplated that most
units (other than ILA Class B 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
Units generally are only issued upon exchange from Class B Shares 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 are sold subject to a contingent deferred sales
charge of up to 5.0% through brokers and dealers who are members of the National
Association of Securities Dealers Inc. and certain other financial services
firms that have sales arrangements with Goldman Sachs. ILA Class B Units of the
Prime Obligations Portfolio bear the cost of distribution (Rule 12b-1) fees at
the aggregate rate of up to 0.75% of the average daily net assets attributable
to ILA Class B Units. ILA Class B Units of the Prime Obligations Portfolio also
bear the cost of an Authorized Dealer Service Plan at an annual rate of up to
0.25% of the average daily net assets of the Prime Obligations Portfolio
attributable to ILA Class B Units.
It is possible that an institution or its 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 and ILA Class B Units
each have certain exclusive voting rights on matters relating to their
respective plans. Units of each class may be exchanged only for Units of the
same class in another Portfolio or, in the case of the Prime Obligations
Portfolio, shares of the corresponding class of certain other mutual funds
sponsored by Goldman Sachs. Except as described above, the four classes of
units are identical. Certain aspects of the Units may be altered, after advance
notice to unitholders,
72
<PAGE>
if it is deemed necessary in order to satisfy certain tax regulatory
requirements.
Each ILA Unit, ILA Administration Unit, ILA Service Unit and ILA Class B
Unit of a Portfolio is entitled to one vote per unit; however, separate votes
will be taken by each Portfolio or class (or by more than one Portfolio or class
voting as a single class if similarly affected) on matters affecting only that
individual Portfolio or class (or those affected Portfolios or classes) or as
otherwise required by law. Units are freely transferable and have no
preemptive, subscription or conversion rights. All units issued and outstanding
are fully paid and nonassessable. The Declaration of Trust provides for
unitholder voting only for the election or removal of one or more Trustees, if a
meeting is called for that purpose, and for certain other designated matters.
The Trust does not generally hold annual or other meetings of unitholders. The
units of the Portfolios have non-cumulative voting rights, which means that the
holders of more than 50% of the units voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the units voting for the election of
Trustees will not be able to elect any person or persons to the Board of
Trustees. Each Trustee serves until the next meeting of unitholders, if any,
called for the purpose of electing or reelecting such Trustee or successor to
such Trustee, and until the election and qualification of such successor, if
any, or until such Trustee sooner dies, resigns, retires or is removed by the
unitholders or two-thirds of the Trustees.
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were [insert names].
As of April ___, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were [insert names].
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<PAGE>
As of April ___, 1997, the only holder of record of 5% or more of the
outstanding units of the Federal Portfolio was [insert names].
As of April ___, 1997, the only holder of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was [insert names].
UNITHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Delaware business
trust," which is the form in which many mutual funds are organized. Under
Delaware law, the unitholders of the Delaware trust are not generally subject to
liability for the debts or obligations of the trust. Similarly, Delaware law
provides that a Portfolio will not be liable for the debts or obligations of any
other series of the Delaware business 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 of the 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 of the Trust provides for
indemnification by the relevant Fund for any loss suffered by a unitholder as a
result of an obligation of the Portfolio. The Declaration of Trust of the 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.
On any matter submitted to a vote of the Unitholders of the Trust, all
Units shall be voted in the aggregate not by individual Portfolio or Class,
except (a) when required by the 1940 Act, Units shall be voted by individual
Portfolio or Class, and (b) when the Trustees have determined that the matter
affects the interests of only one or more Portfolios or Classes, then only the
Unitholders of all such Portfolios or Classes shall be entitled to vote. As
determined by the Trustees without the vote or consent of Unitholders, on any
matter submitted to a vote of Unitholders, either (i) each whole Unit shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Unit shall be entitled to a proportionate fractional vote or (ii)
each dollar of Net Asset Value (number of Units owned times Net Asset Value per
share of such Portfolio or Class, as applicable) shall be entitled to one vote
on any matter on which such Units are entitled to vote and each fractional
dollar amount shall be entitled to a proportionate fractional vote. There is no
cumulative voting in the election of Trustees.
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<PAGE>
In connection with the establishment of one or more Portfolios or Classes,
the Trustees establishing such Portfolios or Classes may appoint, to the extent
permitted by the Delaware Business Trust Act, separate Trustees with respect to
such Portfolios or Classes (the "Series Trustees"). Series Trustees may, but
are not required to, serve as Trustees of the Trust or any other Portfolio or
Class of the Trust. To the extent provided by the Trustees in the appointment
of Series Trustees, the Series Trustees may have, to the exclusion of any other
Trustee of the Trust,all the powers and authority of Trustees with respect to
such Portfolio or Class, but may have no power or authority with respect to any
other Portfolio or Class. Unitholders for a Portfolio or Class with respect to
which Series Trustees have been appointed shall only be entitled to vote in the
election of such Series Trustees.
Upon the vote of a majority of the Units outstanding and entitled to vote
of the Trust or of each Portfolio to be affected, the Trustees may (i) sell and
convey all or substantially all of the assets of all Portfolios or any affected
Portfolio to another Portfolio or to another entity which is an open-end
investment company as defined in the 1940 Act, or is a Portfolio thereof, for
adequate consideration, which may include the assumption of all outstanding
obligations, taxes and other liabilities, accrued or contingent, of the Trust or
any affected Portfolio, and which may include Units of or interests in such
Portfolio, entity, or Portfolio thereof; or (ii) at any time sell and convert
into money all or substantially all of the assets of all Portfolios or any
affected Portfolio. The Trustees may take any of the actions specified above
without obtaining the vote of a majority of the outstanding Units of the Trust
or any Portfolio if a majority of the Trustees determines, in their sole
discretion, that the continuation of the Trust of Portfolio is not in the best
interests of the Trust, such Portfolio, or their respective Unitholders. Also,
the Trustees may, without Unitholder approval unless such approval is required
by applicable federal law, (i) cause the Trust to merge or consolidate with or
into one or more entities, if the surviving or resulting entity is the Trust or
another open-end management investment company under the 1940 Act, or a
Portfolio thereof, (ii) cause the Units to be exchanged under or pursuant to any
state or federal statute to the extent permitted by law, or (iii) cause the
Trust to incorporate under the laws of Delaware or any other U.S. jurisdiction.
The Trustees may, without Unitholder approval, invest all or a portion of the
assets of any Portfolio, or dispose of all or a portion of the assets of any
Portfolio, and invest the proceeds of such disposition in interests issued by
one or more other investment companies registered under the Investment Company
Act. The Trustees may, without Unitholder approval unless such approval is
required by applicable law, cause a Portfolio that is organized in the
master/feeder fund structure to withdraw or redeem its assets from the master
fund and cause such Portfolio to invest its assets directly in securities and
other financial instrument or in another master fund.
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<PAGE>
SERVICE PLAN
(ILA Service Units Only)
The Trust, on behalf of each Portfolio, has adopted a service plan (the
"Plan") with respect to the ILA Service Units which authorizes the Portfolios to
compensate Service Organizations for providing certain account administration
and personal account maintenance services to their customers who are or may
become beneficial owners of such units. Pursuant to the Plan, the Trust, on
behalf of each Portfolio, enters into agreements with Service Organizations
which purchase ILA Service Units on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may: (a)
act, directly or through an agent, as the sole unitholder of record and nominee
for all customers, (b) maintain account records for each customer who
beneficially owns ILA Service Units, (c) answer questions and handle
correspondence from customers regarding their accounts, (d) process customer
orders to purchase, redeem and exchange ILA Service Units, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in units by customers, (f)
provide facilities to answer questions from prospective and existing investors
about ILA Service Units, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization, and (j) act as liaison between customers and the Trust, including
obtaining information from the Trust, working with the Trust to correct errors
and resolve problems and providing statistical and other information to the
Trust. As compensation for such services, the Trust on behalf of each Portfolio
pays each Service Organization a service fee in an amount up to .40% (on an
annualized basis) of the average daily net assets of the ILA Service Units of
each Portfolio attributable to or held in the name of such Service Organization
for its customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, with respect to each Portfolio, the amount of the service
fees paid by each Portfolio then in existence to Service Organizations was as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $937,733 $630,669
Money Market Portfolio 102,642 82,267
</TABLE>
76
<PAGE>
<TABLE>
<S> <C> <C> <C>
Treasury Obligations
Portfolio 478,419 435,536
Treasury Instruments
Portfolio 316,188 187,470
Government Portfolio 430,114 603,447
Federal Portfolio 254,508 34,415
Tax-Exempt Diversified
Portfolio 220,790 187,137
Tax-Exempt California
Portfolio -- --
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
77
<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 UNITS ONLY)
AUTHORIZED DEALER SERVICE PLAN
==============================
As described in the Prospectus, the Prime Obligations Portfolio with
respect to its ILA Class B Units has adopted a non-Rule 12b-1 Authorized Dealer
Service Plan (an "Authorized Dealer Service Plan") pursuant to which Goldman
Sachs and Authorized Dealers are compensated for the provision of personal and
account maintenance services. The Authorized Dealer Service Plan has been most
recently approved by the Board of Trustees, including a majority of the non-
interested Trustees who have no direct or indirect financial interest in the
Authorized Dealer Service Plan, at a meeting held on April 23, 1997. With
respect to its ILA Class B Units, the Prime Obligations Portfolio's Authorized
Dealer Service Plan provides for the compensation for personal and account
maintenance services at an annual rate of up to 0.25% of the Portfolio's average
daily net assets attributable to ILA Class B Units.
The Authorized Dealer Service Plan will remain in effect until June 1, 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 Prime Obligations Portfolio
without payment of any penalty by a vote of a majority of the non-interested
Trustees of the Trust or by vote of a majority of the outstanding ILA Class B
Units of the Prime Obligations Portfolio. The Trustees of the Trust have
determined that in their judgment there is a reasonable likelihood that the
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<PAGE>
Authorized Dealer Service Plan will benefit the Prime Obligations Portfolio and
its ILA Class B Unitholders.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted, on behalf of the Prime Obligations Portfolio, a distribution plan (the
"Class B Plan") pursuant to Rule 12b-1 under the Investment Company Act with
respect to ILA Class B Units. See "Distribution and Authorized Dealer Service
Plans" in the Prospectus.
The Class B Plan was most recently approved on April 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.
The Class B Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plan were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Prime Obligations
Portfolio would cease to make distribution payments to Goldman Sachs and Goldman
Sachs would be unable to recover the amount of any of its unreimbursed
distribution expenditures.
Under the Class B Plan, Goldman Sachs, as distributor of the Portfolio's
ILA Class B Units, will provide to the Board of Trustees for its review, and the
Board will review at least quarterly, a written report of the services provided
and amounts expended by Goldman Sachs under the Class B Plan and the purposes
for which such services were performed and expenditures were made.
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
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<PAGE>
of Trustees, including a majority of the non-interested Trustees. A Class B
Plan may not be amended to increase materially the amount to be spent for the
services described therein as to the Prime Obligations Portfolio without
approval of a majority of the outstanding ILA Class B Unitholders of that
Portfolio. All material amendments of the Class B Plan must also be approved by
the Board of Trustees of the Trust in the manner described above. 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.
81
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- ----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1997.
FST SHARES
- ----------------------------------------------------------------
Goldman Sachs Trust (the "Trust") is a no-load, open-end, diversified,
management investment company (or mutual fund) which includes the Financial
Square Funds. This Statement of Additional Information relates solely to the
offering of FST Shares of Financial Square Prime Obligations Fund ("Prime
Obligations Fund"), Financial Square Money Market Plus Fund ("Plus Fund"),
Financial Square Money Market Fund ("Money Market Fund"), Financial Square
Treasury Obligations Fund ("Treasury Obligations Fund"), Financial Square
Treasury Instruments Fund ("Treasury Instruments Fund"), Financial Square
Government Fund ("Government Fund"), Financial Square Federal Fund ("Federal
Fund"), Financial Square Tax-Free Money Market Fund ("Tax-Free Fund") and
Financial Square Municipal Money Market Fund ("Municipal Fund") (individually,
a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser. Goldman Sachs serves as the Funds' distributor and
transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority that
Goldman Sachs places on serving clients' interests. As Goldman Sachs clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, shareholders can call their AA through a toll-free number to place
purchase or redemption orders or obtain Fund and account information. The AA
can also answer inquiries about rates of return and portfolio
composition/holdings, and guide shareholders through operational details. A
Goldman Sachs client can also utilize the SMART(SM) personal computer software
system which
<PAGE>
allows shareholders to purchase or redeem shares and also obtain Fund and
account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus relating to FST Shares dated May 1, 1997, a
copy of which may be obtained without charge by calling Goldman Sachs at
800-621-2550 or by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois
60606.
2
<PAGE>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
-------------------
Investment Policies and Practices
of the Funds 4
Investment Limitations 17
Trustees and Officers 21
The Adviser, Distributor and Transfer
Agent 27
Portfolio Transactions 30
Net Asset Value 32
Redemptions 34
Calculation of Yield Quotations 35
Tax Information 38
Organization and Capitalization 42
Custodian and Subcustodian 47
Independent Accountants 47
Financial Statements 47
Appendix A (Description of Securities
Ratings) A-1
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
- --------------------------
Each Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.
CUSTODIAL RECEIPTS
- ------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank
on behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). Although
custodial receipts are not considered U.S. Government securities for certain
securities law purposes, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities.
BANK AND CORPORATE OBLIGATIONS
- ------------------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. The commercial paper
purchased by the Funds consists of direct U.S. dollar denominated obligations
of domestic, or in the case of the Money Market and Plus Funds, foreign
issuers. Bank obligations in which the Funds may invest include certificates
of deposit, bankers' acceptances, fixed time deposits and bank notes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect,
4
<PAGE>
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.
Prime Obligations Fund, Plus Fund and Money Market Fund may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements
will also guarantee the return of principal and may guarantee a stream of
payments over time. A funding agreement has a fixed maturity date and may have
either a fixed rate or variable interest rate that is based on an index and
guaranteed for a set time period. Because there is no secondary market for
these investments, any such funding agreement purchased by a Fund will be
regarded as illiquid.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund (other than Treasury Instruments Fund) may only enter into repurchase
agreements with primary dealers in U.S. Government Securities. A repurchase
agreement is an arrangement under which the purchaser (i.e., the Fund)
purchases a U.S. Government security or other high quality short-term debt
obligation (the "Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Funds' custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the Funds,
that utilize them. Such risks are not unique to the Funds but are inherent in
repurchase agreements. The Funds seek to minimize such risks by, among others,
the means indicated below, but because of the inherent legal uncertainties
5
<PAGE>
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 federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the Obligation.
It is not clear whether for other purposes a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by a Fund or as being collateral for a loan by the Fund to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller of
the Obligation, a court holds that a Fund does not have a perfected security
interest in the Obligation, a Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As
an unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. To minimize this risk, the
Funds utilize custodians and subcustodians that the Adviser believes follow
customary securities industry practice with respect to repurchase agreements,
and the Adviser analyzes the creditworthiness of the obligor, in this case the
seller of the Obligation. But because of the legal uncertainties, this risk,
like others associated with repurchase agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Such a delay may involve loss of interest or
a decline in the price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the Obligation subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that
the market value of all securities subject to the repurchase agreement equals
or exceeds the repurchase price.
Certain repurchase agreements which mature in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such
repurchase agreements will be regarded as liquid instruments.
In addition, the Funds, (other than the Treasury Instruments Fund) together
with other registered investment companies having management agreements with
the Adviser or any of its affiliates, may transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
- ------------------
Money Market Fund and Plus Fund may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Tax-Free Fund
and Municipal Fund may also invest in municipal instruments backed by letters
of credit issued by certain of such banks. Under current Securities and
Exchange Commission ("SEC") rules relating to the use of the amortized cost
method of portfolio securities valuation, Money Market Fund and Plus Fund are
restricted to purchasing U.S. dollar denominated securities, but they are not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against
a foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
- ----------------------------------------------
Each of Prime Obligations Fund, Money Market Fund and Plus Fund may invest in
asset-backed and receivables-backed securities. Asset-backed and
receivables-backed securities represent participations in, or are secured by
and payable from, pools of assets such as motor vehicle installment sale
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (credit card) agreements,
corporate securities and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution, or other
credit enhancements may be present. The value of a Fund's investments in
asset-backed and receivables-backed securities may be adversely affected by
prepayment of the underlying obligations. In addition, the risk of prepayment
may cause the value of these investments to be more volatile than a Fund's
other investments.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective
7
<PAGE>
investment objective and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. This
Statement of Additional Information will be amended or supplemented as
necessary to reflect the Prime Obligations, Money Market and Plus Funds'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, the Funds will generally not invest in an asset-backed security if the
income received with respect to such investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments in response to interest rate fluctuations.
As set forth above, several types of asset-backed and receivables-backed
securities have already been offered to investors, including, for example,
Certificates for Automobile Receivablessm ("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
8
<PAGE>
to make payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor or servicer. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
losses results from payment of the insurance obligations on at least a portion
of the assets in the pool. This protection may be provided through guarantees,
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transactions or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information reflecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the value of or return on an investment in such a security.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments could require
Prime Obligations, Money Market or Plus Fund to dispose of any of their
respective existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be
traded over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered
to the Fund on the settlement date. The Fund may realize a capital gain or
loss in connection with these transactions distributions from which would be
taxable to its shareholders. For purposes of determining the Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Fund's custodian or subcustodian will maintain in a segregated account cash
or liquid assets, as
9
<PAGE>
applicable by law having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
to sell portfolio securities subject to such commitment, the custodian or
subcustodian will hold the portfolio securities in a segregated account while
the commitment is outstanding. These procedures are designed to ensure that
the Fund will maintain sufficient assets at all times to cover its obligations
under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable amount master demand notes. These obligations permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between a Fund, as lender, and the borrower. Variable
amount master demand notes are direct lending arrangements between the lender
and borrower and are not generally transferable nor are they ordinarily rated.
A Fund may invest in them only if the Adviser believes that the notes are of
comparable quality to the other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
- --------------------------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable and floating rate demand instruments that are tax exempt
municipal obligations or other debt securities that possess a floating or
variable interest rate adjustment formula. These instruments permit a Fund to
demand payment of the principal balance plus unpaid accrued interest upon a
specified number of days' notice to the issuer or its agent. The demand
feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a Fund may
purchase provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer
unless a Fund instructs otherwise. The Trust, on behalf of a Fund, intends to
exercise the demand only (1) upon a default under the terms of the debt
security, (2) as needed to provide liquidity to a Fund, (3) to maintain the
respective quality standards of a Fund's investment portfolio, or (4) to attain
a more optimal portfolio structure. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. To be eligible
for purchase of a Fund, a variable or floating rate
10
<PAGE>
demand instrument which is unrated must have quality characteristics similar to
those of other obligations in which the Fund may invest. The Adviser may
determine that an unrated variable or floating rate demand instrument meets a
Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for a Fund. Thus,
either the credit of the issuer of the obligation or the guarantor bank or both
will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held by a Fund
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The acquisition of variable or floating rate demand notes for
a Fund must also meet the requirements of rules issued by the SEC applicable to
the use of the amortized cost method of securities valuation. The Funds will
also consider the liquidity of the market for variable and floating rate
instruments and in the event that such instruments are illiquid, the Funds'
investments in such instruments will be subject to the limitation on illiquid
securities.
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
Fund and Federal Funds) may invest in participation interests in variable or
floating rate tax-exempt obligations held by financial institutions (usually
commercial banks). Such participation interests provide a Fund with a specific
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of its proportional interest in the unpaid principal balance
plus accrued interest from the financial institution upon a specific number of
days' notice. In addition, the participation interest generally is backed by
an irrevocable letter of credit or guarantee from the institution. The
financial institution usually is entitled to a fee for servicing the obligation
and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
- ----------------------------------------
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended ("1933 Act"),
including restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of the value of its net assets in securities which are illiquid,
which includes fixed time deposits and repurchase agreements maturing in more
than seven days that cannot be traded on a secondary market and restricted
securities, unless, in the case of restricted securities, the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are liquid. The
Board of Trustees may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring liquidi-
11
<PAGE>
ty of restricted securities. The Board of Trustees, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board of
Trustees will carefully monitor each Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MUNICIPAL OBLIGATIONS
- ---------------------
Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund and
Municipal Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
Notes. Municipal notes are generally used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of
the issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation
notes are sold to provide interim financing in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or
agency thereof. The Funds which invest in municipal obligations may also
acquire securities in the form of custodial receipts which evidence ownership
of future interest payments, principal payments or both on certain state and
local governmental and authority obligations where, in the opinion of bond
counsel, interest payments with respect to such custodial receipts are excluded
from gross income for
12
<PAGE>
federal income tax purposes. Such obligations are held in custody by a bank on
behalf of the holders of the receipts. These custodial receipts are known by
various names, including "Municipal Receipts" ("MRs") and "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS"). There are a
number of other types of notes issued for different purposes and secured
differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of
public projects including the construction or improvement of schools, highways
and roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds, the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Tax-Free Fund does not intend to invest in
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<PAGE>
private activity bonds if the interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds. The
serial bonds which the Funds may purchase are limited to short-term serial
bonds--those with original or remaining maturities of thirteen months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Funds may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Fund's commitment to put
the bond back to the issuer at par at a designated time within thirteen months
and the issuer's commitment to so purchase the bond at such price and time.
The Funds which invest in municipal obligations may invest in tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the bond, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults by, or a
significant downgrading in the credit rating assigned to, the issuer of the
bond.
The tender option will be taken into consideration in determining the maturity
of tender option bonds and the average portfolio maturity of each Fund. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity.
Consequently, tender option bonds are deemed to be liquid unless, in the
opinion of the Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the relevant Fund's credit quality
requirements, to be inadequate.
Although Tax-Free Fund and Municipal Fund intend to invest in tender option
bonds the interest on which will, in the opinion of counsel for the issuer and
sponsor or counsel selected by the Adviser, be excluded from gross income for
federal income tax
14
<PAGE>
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
A similar risk exists for certain other investments subject to puts or similar
rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. Tax-Free Fund and Municipal Fund intend to
manage their respective portfolios in a manner designed to eliminate or
minimize any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds, there
are a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
Tax-Free Fund and Municipal Fund may purchase municipal instruments that are
backed by letters of credit issued by foreign banks that have a branch, agency
or subsidiary in the United States. Such letters of credit, like other
obligations of foreign banks, may involve credit risks in addition to those of
domestic obligations, including risks relating to future political and economic
developments, nationalization, foreign governmental restrictions such as
exchange controls and difficulties in obtaining or enforcing a judgment against
a foreign bank (including branches).
For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal obligations that are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the 1933 Act prior to offer and sale, unless an exemption from such
registration is available, municipal obligations which are not publicly offered
may nevertheless be readily marketable. A secondary market may exist for
municipal obligations which were not publicly offered initially.
Municipal obligations purchased for a Fund are subject to the policy on
holdings of securities which are not readily marketable contained in the Fund's
Prospectus. The Adviser determines whether a municipal obligation is liquid
based on whether it may be sold in a reasonable time consistent with the
customs of the
15
<PAGE>
municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its value. The Adviser believes that the quality standards
applicable to each Fund's investments enhance liquidity. In addition, standby
commitments and demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including money
market conditions, municipal bond market conditions, the size of a particular
offering, the maturity of the obligation and the quality of the issue. High
quality municipal obligations tend to have a lower yield than lower rated
obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
STANDBY COMMITMENTS
- -------------------
In order to enhance the liquidity, stability or quality of municipal
obligations, Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free
Fund and Municipal Fund may each acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment", depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from the
Fund. The right to sell may be exercisable on demand or at specific
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Adviser will look to the creditworthiness of the party providing the Fund with
the right to sell.
The Funds each value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments
is expected to approximate such amortized cost. No value is assigned to the
standby commitments for purposes of determining the Fund's net asset value.
Since the value of a standby commitment is dependent on the ability of the
standby commitment writer to meet its obligation to repurchase, the policy of
each Fund that may enter into such transactions is
16
<PAGE>
to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Fund.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The Internal Revenue
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers, and which are applicable only to
the taxpayer requesting the ruling and which have, on occasion, been reversed
by the Internal Revenue Service) to the effect that they are considered the
owners of the municipal obligations subject to standby commitments so that the
interest on such instruments will be tax-exempt income to them. The Internal
Revenue Service has subsequently announced that it will not ordinarily issue
advance letter rulings as to the identity of the true owner of property in
cases involving the sale of securities or participation interests therein if
the purchaser has the right to cause the security, or the participation
interest therein, to be purchased by either the seller or a third party. The
Tax-Free Fund and Municipal Fund each intends to take the position that it is
the owner of any municipal obligations acquired subject to a standby commitment
or acquired or held with certain other types of put rights and that its
distribution of tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt for its shareholders. There is no assurance
that standby commitments will be available to these Funds and neither Fund has
assumed that such commitments will be available under all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used
in the Prospectus and this Statement of Additional Information, means the
lesser of (1) 67% of the shares of that Fund present at a meeting if the
holders of more than 50% of the outstanding shares of that Fund are present in
person or by proxy, or (2) more than 50% of the outstanding shares of that
Fund). Investment restrictions that involve a maximum percentage of securities
or assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund, with the exception of borrowings permitted by Investment Restriction (3).
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<PAGE>
Accordingly, the Trust may not on behalf of any Fund:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act. This restriction
does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act.
(2) purchase securities if such purchase would cause more than 25% or more in
the aggregate of the market value of the total assets of a Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, however there is no limitation
with respect to, and each Fund (other than Money Market Fund and Plus
Fund) reserves freedom of action, when otherwise consistent with its
investment policies, to concentrate its investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
obligations (other than commercial paper) issued 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. Each of Money Market Fund and Plus Fund may
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements and securities loans collateralized by such obligations and
will invest more than 25% of its total assets in obligations issued or
guaranteed by banks (whether foreign or domestic) and repurchase
agreements and securities loans collateralized by such obligations.
However, if adverse economic conditions prevail in the banking industry,
each of Money Market Fund and Plus Fund may, for defensive purposes,
temporarily invest less than 25% of the value of its total assets in 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.
(3) borrow money, except (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through reverse repurchase agreement in
amounts up to 331/3% 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, and (d) the Fund may
purchase securities on margin to the extent permitted by applicable law.
18
<PAGE>
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each Funds 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 a 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.
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 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 Board of Trustees
of the Trust has adopted the following non-fundamental policies which may be
changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on the behalf of any Fund:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a 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 exceed 5%
of its net assets.
(d) make short sales of securities, except short sales against the box.
Pursuant to SEC Rule 2a-7, under the Investment Company Act, each fund may not
invest more than 5% of its total assets (taken at
19
<PAGE>
amortized cost) 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). A Fund 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. Each Fund, other than
the Tax-Free Fund and Municipal Fund, may only purchase "First Tier Securities"
as defined below. Securities which are rated in the highest short-term rating
category by at least two Nationally Recognized Statistical Rating Organizations
("NRSROs"), or if only one NRSRO has assigned a rating by that NRSRO, are
"First Tier Securities". Securities rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a rating,
by that NRSRO, but which are not First Tier Securities, are "Second Tier
Securities". Pursuant to SEC Rule 2a-7 the foregoing operating policies are
not applicable to Tax-Free Fund and Municipal Fund. With respect to 75% of
each Fund's assets, not more than 10% of such Fund's total assets may be
invested in securities issued by or subject to demand features or guarantees
from the same issuer. A Tax-Exempt Fund's investment in conduit securities
(Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier securities are limited to 5% of the
Fund's total assets (1% per issuer). "NRSROs" include Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps, Inc., Fitch
Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc., and Thomson
BankWatch, Inc. For a description of their rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities"
shall mean securities issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Board of Trustees and officers of the Trust is
set forth below. Trustees and officers deemed to be "interested persons" of
the Trust for purposes of the Investment Company Act are indicated by an
asterisk.
20
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------
Ashok N. Bakhru, 53 Chairman Executive Vice President -
1325 Ave. of Americas & Trustee Finance and Administration and
NY, NY 10019 Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (since June 1994) Retired.
Senior Vice President of Scott Paper
until June 1994 Company; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the
Walnut Street Theater.
*David B. Ford, 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 Goldman Sachs Asset
Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
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 Goldman
Sachs Asset Management (since
November 1995); Limited Partner of
21
<PAGE>
Goldman Sachs (1994 to November
1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation Bryn
Mawr, PA 19010 (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 York,
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).
22
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, One
Northfield Plaza 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
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
701 Morningside Drive Financial and Administrative
Lake Forest, IL 60045 Officer, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October
1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs
Funds Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
23
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Management
New York, NY (since February 1994); Vice
10004 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
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
24
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset
Management (since 1993); Funds
Trading Assistant, GSAM (1993-1995);
Compliance Analyst, Prudential
Insurance (1991-1993).
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 ___,
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.
25
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
______________
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
26
<PAGE>
THE ADVISER, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
- -----------
GSAM, a separate operating division of Goldman Sachs, acts as the investment
adviser to the Funds. Under the Management Agreement between Goldman Sachs and
the Trust on behalf of the Funds, GSAM, subject to the supervision of the Board
of Trustees of the Trust and in conformity with the stated policies of each
Fund, acts as investment adviser and directs the investments of the Funds. In
addition, GSAM administers the Funds' 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 .205% of each Fund's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, advisory fees,
taxes, interest, brokerage and litigation, indemnification and other
extraordinary expenses) of each Fund, on an annualized basis, to .01% of the
average daily net assets of that Fund. The amount of such reductions or limits,
if any, are calculated monthly and are based on the cumulative difference
between a Fund's estimated annualized expense ratio and the expense limit for
that Fund. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Fund's
annual total operating expenses (excluding fees of Service Organizations ) to
.18% of average daily net assets.
The Trust, on behalf of each Fund, is responsible for all expenses other than
those expressly borne by GSAM under the Funds' Management Agreement. The
expenses borne by Shares of each Fund 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 Shares 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 Trust), expenses of preparing and setting in
type prospectuses, statements of additional information, proxy material,
reports and notices, the printing and distribution of the same to Shareholders
and regulatory authorities, its proportionate share of the compensation and
expenses of its "non-interest-
27
<PAGE>
ed" Trustees, and extraordinary expenses incurred by the Portfolios.
For the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994 the amount of the management fee incurred by each Fund was as follows:
Dec. 1996 Dec. 1995 Dec. 1994
--------- --------- ---------
Prime Obligations Fund 1,692,924 695,689(4)
Money Market Fund(1) 211,326 64,294
Treasury Obligations Fund 565,477 225,733(4)
Government Fund(2) 263,804 50,687(4)
Tax Free Money Market Fund(3) 25,151 0
- ------------------------------------------
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The Information presented for the period ended December 31, 1994 reflects
eleven months of operations.
GSAM has agreed that it will not impose a portion of its fee referred to above,
pursuant to applicable contracts. Had such fees been imposed, the following
additional fees would have been incurred by these Funds for the periods
indicated:
Dec. 1996 Dec. 1995 Dec. 1994
--------- ----------- ----------
Prime Obligations Fund $3,173,924 $1,609,383
Treasury Obligations Fund 1,747,326 554,447
Government Fund(2) 493,804 128,944
Money Market Fund(1) 1,059,477 482,154
Tax Free Money Market Fund(3) 270,151 53,176
- ------------------------------------------
(1) Commenced operations April 6, 1993.
(2) Commenced operations May 18, 1994.
(3) Commenced operations July 19, 1994.
The Management Agreement entered into on behalf of the Funds was most recently
approved by the Trustees, including the "non-interested" Trustees, on April 23,
1997. The Management Agreement will remain in effect until June 30, 1997 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the particular Fund (as
defined in the Investment Company Act) and, in either case, by a majority of
"non-interested" Trustees.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who has been elected or appointed as a Trustee or officer of the
Trust to serve in the capacities in which he or she has been elected and
appointed.
28
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Fund during various periods of 1996, 1995 and 1994 to the extent such expenses
would have caused each Fund'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:
12/31/96 12/31/95 1/31/94
-------- -------- -------
Prime Obligations Fund $382,318 $ -0-
Money Market Fund 420,234 N/A
Treasury Obligations 280,395 -0-
Government Fund(1) 197,008 98,125
Tax Free Money Market Fund 83,376 N/A
__________________________
(1) Commenced operations April 6, 1993
Each Fund may use any name derived from the name "Goldman Sachs" only as long
as its Management Agreement remains in effect. Each Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated with respect to any particular Fund without penalty by vote of a
majority of the Trustees or a majority of the outstanding voting securities of
that Fund or by either party upon sixty (60) days' written notice to GSAM or by
GSAM without penalty at any time on 90 days' written notice to the Trust.
In managing the Tax-Free Money Market Fund, GSAM will draw upon the extensive
research generated by Goldman Sachs' Municipal Credit Group. The Credit
Group's research team continually reviews current information regarding the
issuers of municipal and other tax-exempt securities, with particular focus on
long-term creditworthiness, short-term liquidity, debt service costs, liability
structures, and administrative and economic characteristics.
Under a previous Administration Agreement, GSAM administered each Fund's
business affairs subjet to the supervision of the Trustees. GSAM received a
separate account administration fee from the Fund with respect to such
services.
For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the amounts of account administration fees paid to GSAM by
the Funds were as follows:
Dec. 1996 Dec. 1995 Dec. 1994(4)
--------- ----------- ------------
Prime Obligations Fund $5,501,468 $2,789,597
Money Market Fund(1) 3,024,701 835,827
Treasury Obligations Fund 1,836,426 961,040
Government Fund(2) 855,927 193,154
Tax-Free Fund(3) 434,262 35,436
_______________
29
<PAGE>
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
Had fee reductions not been in effect, Government Fund would have paid
account administration fees of $223,500 for the eleven months ended December
31,1994, and Tax-Free Fund would have paid account administration fees of
$92,169 for the period from July 19, 1994 (commencement of operations) to
December 31, 1994. The Money Market and Tax-Free Funds would have paid account
administration fees of $3,028,701 and $468,262, respectively, for the period
February 1, 1995 to January 31, 1996.
THE DISTRIBUTOR AND TRANSFER AGENT
- ----------------------------------
Goldman Sachs acts as principal underwriter and distributor of each Fund's
shares pursuant to a Distribution Agreement with the Trust which was most
recently approved by the Board of Trustees on April 23, 1997. Goldman Sachs
also serves as the transfer agent of each Fund. Goldman Sachs provides
customary transfer agency services to the Funds, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, payment of dividends and
distributions and related functions. Goldman Sachs currently imposes no fees
under its transfer agency agreement.
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 ___, 1996,
Goldman Sachs and its consolidated subsidiaries had assets of approximately
$____ billion and partners' capital of $___ billion. Goldman Sachs became
registered as an investment adviser in 1981. As of March ___, 1997, Goldman
Sachs, together with its affiliates, acted as investment adviser, administrator
or distributor for approximately $___ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms. GSAM uses its best efforts to
obtain execution of portfolio transactions at prices which are advantageous to
each Fund and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, GSAM will use its best judgment in evaluating the terms of a
transaction, and will give 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
30
<PAGE>
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions,
and the reasonableness of the spread or commission, if any. Securities
purchased and sold by the Funds are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through broker-dealers and
banks acting for their own account rather than as brokers, or otherwise involve
transactions directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many types
of municipal and money market instruments. Its activities in this regard could
have some effect on the markets for those instruments which the Funds buy, hold
or sell. An order has been granted by the SEC under the Investment Company Act
which permits the Funds to deal with Goldman Sachs in transactions in certain
taxable securities in which Goldman Sachs acts as principal. As a result, the
Funds may trade with Goldman Sachs as principal subject to the terms and
conditions of such exemption.
Under the Investment Company Act, the Funds are prohibited from purchasing any
instrument of which Goldman Sachs is a principal underwriter during the
existence of an underwriting or selling syndicate relating to such instrument,
absent an exemptive order (the order referred to in the preceding paragraph
will not apply to such purchases) or the adoption of and compliance with
certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of
the Trust's assets that may be invested in any single offering. Accordingly,
in view of Goldman Sachs' active role in the underwriting of debt securities, a
Fund's ability to purchase debt securities in the primary market may from time
to time be limited.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another fund of the Trust or one or more of
the other clients of GSAM. Investment decisions for each Fund and for GSAM's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security 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
31
<PAGE>
allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security in a particular transaction as far as a
Fund is concerned. Each Fund believes that over time its ability to
participate in volume transactions will produce better executions for the
Funds.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: [insert names]
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund and
Treasury Obligations Fund) is determined by the Funds' custodian as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New
York time) (in the case of the Government Fund and Treasury Obligations Fund,
net asset value is determined at 5:00 p.m. New York time) on each Business Day.
A Business Day means any day on which the New York Stock Exchange is open,
except for days on which banks in Chicago, Boston or New York are closed on
local holidays. Such holidays include: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $1.00 per
share, which the Trustees has determined to be in the best interests of each
Fund and its shareholders. 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 certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a
Fund would receive if it sold the instrument. During such periods, the yield
to an investor in a Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of the Funds may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Fund on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.
32
<PAGE>
The Trustees has established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio by the Trustees, at such intervals as it deems appropriate, to
determine whether such Fund's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per share based on amortized cost, as well as
review of the methods used to calculate the deviation. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any,
will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it will take such corrective action as
it regards to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00 the Trustees has the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends. Each Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no return is earned, would tend to
lower the yield on such Fund's shares.
In order to continue to use the amortized cost method of valuation each Fund's
investments, including repurchase agreements, must be U.S. dollar-denominated
instruments which the Trustees determines present minimal credit risks and
which are at the time of acquisition rated by the requisite number of NRSROs in
one of the two highest short-term rating categories or, in the case of any
instrument that is not so rated, of comparable quality as determined by GSAM.
Also, each Fund must maintain a dollar-weighted average portfolio maturity (not
more than ninety (90) days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share and may not purchase any instrument
with a remaining maturity of more than thirteen (13) months. However, a Fund
may also, consistent with the provisions of the above-mentioned rule, invest in
securities with a stated maturity of more than thirteen (13) months, if (i) the
security is a floating or variable rate security with certain demand and
interest rate reset features and (ii) the security, except in the case of
Tax-Free Fund and Municipal Fund, is a First Tier Security.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of credi-
33
<PAGE>
tors, will be specifically allocated to such Fund and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses are
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made. In addition,
within each Fund, FST Shares, FST Administration Shares, FST Service Shares and
FST Preferred Shares (if any) will be subject to different expense structures
(see "Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed for regular trading other than customary weekend and holiday closings
or during which trading on the New York Stock Exchange is restricted, (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable, (iii) as the SEC may by order permit for
the protection of the shareholders of the Trust or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Fund's shares.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from a Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the net asset value of the shares being redeemed. If a shareholder
receives a distribution in kind, he or she should expect to incur transaction
costs when he or she converts the securities to cash.
A FST shareholder of any Fund with balances in excess of $100 million may elect
to have a special account with State Street for the purpose of redeeming shares
from its account in that Fund by check. When State Street receives a completed
signature card and authorization form, the shareholder will be provided with 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 fractional shares will be redeemed to cover the amount of the check.
Cancelled checks will be returned to the shareholder by State Street. The Trust
and Goldman Sachs each reserves the right to waive the minimum requirement.
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<PAGE>
The check redemption privilege enables a shareholder to receive the dividends
declared on the shares 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 an account. If the amount of a check is
greater than the value of shares held in the shareholder's account, the check
will be returned unpaid, and the shareholder may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the
availability of or terminate the check redemption privilege at any time with
respect to a particular shareholder or Service Organization in general. The
Trust and State Street reserve the right at any time to suspend the check
redemption privilege 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 the Funds.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated in accordance with a standard
method prescribed by the rules of the SEC. Under this method, the yield
quotation is based on a hypothetical account having a balance of exactly one
share at the beginning of a seven-day period.
Yield, effective yield and tax equivalent yield are calculated separately for
each class of a Fund's shares. Each class of Share is subject to different
fees and expenses and, consequently, may have differing yields for the same
period.
The yield quotation is computed as follows: the net change, exclusive of
capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest
100th of 1%. Such yield quotation shall take into account all fees that are
charged to a Fund.
Each Fund also may advertise a quotation of effective yield for a seven (7)
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding one (1) to that return, raising the sum to the 365/7 power and
subtracting one from the result, according to the following formula:
Effective Yield=[(base period return + 1)] - 1.
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<PAGE>
Treasury Instruments, Federal Tax-Free and Municipal Funds may also advertise a
tax-equivalent yield which is computed by dividing that portion of a Fund's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or return for
a stated period of time, the return for a Fund will fluctuate from time to time
and does not provide a basis for determining future returns. Return is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to a Fund. The return of each Fund may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Fund, with
respect to FST Shares, FST Administration Shares, FST Service Shares and FST
Preferred Shares for the seven-day period ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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."
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<PAGE>
In the absence of such fee reductions, the yield, effective yield and the
tax-equivalent yield of each Fund for the same period would have been as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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%.
From time to time any Fund may publish an indication of its past performance as
measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes,
Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall Street
Journal.
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 potential benefits to be derived from
asset allocation strategies and the Goldman Sachs mutual funds that may form
part of such an asset allocation strategy. Such advertisements and information
may also include a discussion of GSAM's current economic outlook
37
<PAGE>
and domestic and international market views and recommend periodic tactical
modifications to current asset allocation strategies. Such advertisements and
information may also highlight or summarize the services that GSAM and/or its
affiliates provide in support of an asset allocation program.
TAX INFORMATION
Each Fund has qualified and has elected or intends to qualify and elect to be
treated as a separate regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
does not involve supervision of management or investment practices or policies
by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must, among
other things, (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock, securities or certain other
investments held less than three months; and (c) diversify its holdings so
that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total (gross) assets is represented by cash and cash
items (including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities limited, in respect of any
one issuer, to an amount not greater in value than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of the market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Fund, as a regulated investment company, will not be subject to federal
income tax on any of its net investment income and net realized capital gains
that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Fund
distributes at least 90% of its investment company taxable income (generally
all of its net taxable income other than "net capital gain," which is the
excess of net long-term capital gain over net short-term capital loss) for such
year, and in the case of any Fund that earns tax-exempt interest, at least 90%
of the excess of the tax-exempt interest
38
<PAGE>
it earns over certain disallowed deductions. A Fund will be subject to federal
income tax at regular corporate rates on any investment company taxable income
or net capital gain that it does not distribute for a taxable year. In order
to avoid a nondeductible 4% federal excise tax, a Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98%
of its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous
year that were not distributed in such year and on which the Fund paid no
federal income tax.
Dividends paid by a Fund from taxable net investment income (including income
attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of
net short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of shareholders. Such distributions will not
qualify for the corporate dividends-received deduction. Distributions paid by
a Fund from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of a Fund have been held by such shareholders,
and also will not qualify for the corporate dividends-received deduction. A
Fund's net realized capital gains for a taxable year are computed by taking
into account any capital loss carryforward of that Fund.
Distributions paid by Tax-Free Fund or Municipal Fund from tax-exempt interest
received by it and properly designated as "exempt-interest dividends" will
generally be exempt from regular federal income tax, provided that at least 50%
of the value of the applicable Fund's total assets at the close of each quarter
of its taxable year consists of tax-exempt obligations, i.e., obligations
described in Section 103(a) of the Code (not including shares of other
regulated investment companies that may pay exempt-interest dividends, because
such shares are not treated as tax-exempt obligations for this purpose).
Distributions paid by the other Funds from any tax-exempt interest they may
receive will not be tax-exempt, because they will not satisfy the 50%
requirement described in the preceding sentence. A portion of any tax-exempt
distributions attributable to interest on certain "private activity bonds", if
any, received by a Fund may constitute tax preference items and may give rise
to, or increase liability under, the alternative minimum tax for particular
shareholders. In addition tax-exempt distributions of a Fund may be considered
in computing the "adjusted current earnings" preference item of its corporate
shareholders in determining the corporate alternative minimum tax and the
corporate environmental tax. To the extent that a Fund invests in certain
short-term instruments, including repurchase agreements, the interest on which
is not exempt from federal income tax, any distributions of
39
<PAGE>
income from such investments will be taxable to shareholders as ordinary
income. All or substantially all of any interest on indebtedness incurred
directly or indirectly to purchase or carry shares of Tax-Free Fund or
Municipal Fund will generally not be deductible. The availability of
tax-exempt obligations and the value of these Funds may be affected by
restrictive tax legislation enacted in recent years.
In purchasing municipal obligations, Tax-Free Fund and Municipal Fund each
relies on opinions of nationally-recognized bond counsel for each issue as to
the excludability of interest on such obligations from gross income for federal
income tax purposes. Each Fund does not undertake independent investigations
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis in each share so received equal to the amount of cash
they would have received had they elected to receive cash.
Money Market Fund and/or Plus Fund may be subject to foreign withholding or
other foreign taxes with respect to its investments in certain securities of
foreign entities. These taxes may be reduced under the terms of applicable
U.S. income tax treaties in some cases, and the applicable Fund intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although neither Fund anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by either Fund,
that Fund could make an election under Code Section 853 to permit its
shareholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by the Fund in foreign
countries. In the event such an election is made, shareholders will be
required to include their pro rata share of such taxes in gross income and will
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the Code. Shareholders who are
precluded from taking such credits or deductions will nevertheless be taxed on
their pro rata share of the foreign taxes included in their gross income,
unless they are otherwise exempt from federal income tax.
Each Fund will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the Fund with
their taxpayer identification number or with certain certifications required by
the Internal Revenue Service or if the Internal
40
<PAGE>
Revenue Service or a broker notifies a Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Tax-Free Fund or Municipal Fund will
not be subject to backup withholding if the Fund reasonably estimates that at
least 95% of its distributions will be exempt interest dividends. Each Fund
may refuse to accept an application that does not contain any required taxpayer
identification number or certification that the number provided is correct or
that the investor is an exempt recipient. If the withholding provisions are
applicable, any such distributions, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisors about the applicability of the backup
withholding provisions.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder on the shareholder's
federal income tax return. The Funds will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Free Fund and the Municipal Fund, the amounts
that qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum tax.
Shareholders who received exempt-interest dividends and have not held their
shares of the applicable Fund for its entire taxable year may have designated
as tax-exempt or as a tax preference item a percentage of their distributions
which is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Fund. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in the Fund in the
shareholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Assuming that each Fund qualifies as a regulated investment company for federal
income tax purposes, each Fund, as a series of a Massachusetts business trust,
will not be subject to any income, franchise or corporate excise tax in
Massachusetts.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each shareholder who is not a U.S.
41
<PAGE>
person should consult his or her tax adviser regarding the U.S. and non-U.S.
tax consequences of ownership of shares of a Fund, including the possibility
that such a shareholder may be subject to a U.S. nonresident alien withholding
tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax
treaty) on certain distributions from a Fund or to backup withholding on
certain payments if a current IRS Form W-8 or acceptable substitute is not on
file with the Funds.
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Funds may have tax consequences for
shareholders different from those of a direct investment in the Funds'
securities. Shareholders should consult their own tax advisers concerning
these matters. For example, in such states or localities it may be appropriate
for shareholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Funds in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or exempt from intangibles tax the value of the shares of such companies
attributable to such obligations, subject to certain state-specific
requirements and/or limitations.
This discussion of the tax treatment of the Funds and their shareholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information, which are subject to change either prospectively or retroactively.
ORGANIZATION AND CAPITALIZATION
Goldman Sachs Money Market Trust was established as a Massachusetts business
trust by a Declaration of Trust dated December 6, 1978, and reorganized, as
part of Goldman Sachs Trust, as a Delaware business trust, by a Declaration of
Trust dated January 28, 1997. Each of the Funds became a series of the Trust
pursuant to a reorganization which occurred on April 30, 1997.
Each shareholder is deemed to have expressly assented and agreed to the terms
of the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of shares of beneficial
interest. The Board of Trustees has authority under the Declaration of Trust
to create and classify shares of beneficial interest in separate series without
further action by shareholders. The Declaration of Trust further authorizes
the Board of Trustees to classify or reclassify any series or portfolio of
shares into one or more
42
<PAGE>
classes. The Board of Trustees has authorized the issuance of up to four
classes of shares of each of the Funds: FST Shares, FST Service Shares, FST
Administration Shares and FST Preferred Shares.
Each FST Share, FST Administration Share, FST Service Share and FST Preferred
Share of a Fund represents an equal proportionate interest in the assets
belonging to such Fund. It is contemplated that most shares will be held in
the accounts of which the record owner is a bank or other institution acting,
directly or through an agent, as nominee for its customers who are the
beneficial owners of the shares or another organization designated by such bank
or institution. FST Shares may be purchased for accounts held in the name of
an investor or institution that is not compensated by the Fund for services
provided to the institution's investors. FST Administration Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including maintenance of
account records and processing orders to purchase, redeem and exchange FST
Administration Shares. FST Administration Shares of a Fund bear the cost of
administration fees at the annual rate of up to .25 of 1% of the average daily
net assets of such Shares. FST Preferred Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including acting directly or through an agent, as
the sole shareholder of record, maintain account records of its customers and
processing orders to purchase, redeem and exchange FST Preferred Shares. FST
Preferred Shares of a Fund bear the cost of preferred administration fees at an
annual rate of up to 0.10% of the average daily net assets of such shares. FST
Service Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and shareholder liaison services
to its customers, including maintenance of account records, processing orders
to purchase, redeem and exchange FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. FST Service
Shares of a Fund bear the cost of service fees at the annual rate of up to .50
of 1% of the average daily net assets of such Shares.
It is possible that an institution or its affiliates may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares of a Fund. In the event a Fund is
distributed by sales persons or any other persons, they may receive different
compensation with respect to different classes of shares of a Fund. FST
Administration Shares, FST Preferred Shares and FST Service Shares each have
certain exclusive voting rights on matters relating to their respective plans.
Shares of each class may be exchanged only for shares of the same class in
another Fund. Except as described above, the four classes of shares are
identical. Certain aspects of the shares may be altered, after advance
43
<PAGE>
notice to shareholders, if it is deemed necessary in order to satisfy certain
tax regulatory requirements.
Each FST Share, FST Service Share, FST Administration Share and FST Preferred
Share of a Fund is entitled to one vote per share; however, separate votes will
be taken by the Fund or class (or by more than one fund of the Trust or class
voting as a single class if similarly affected) on matters affecting only the
Fund or class (or those affected Funds or classes) or as otherwise required by
law. Shares are freely transferable and have no preemptive, subscription or
conversion rights. All shares issued and outstanding are fully paid and
non-assessable. The Declaration of Trust provides for shareholder voting only
for the election or removal of one or more Trustees, if a meeting is called for
that purpose, and for certain other designated matters. The Trust does not
generally hold annual or other meetings of shareholders. The shares of the
Trust have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so, and, in such event, the holders of the
remaining less than 50% of the shares voting for the election of Trustees will
not be able to elect any person or persons to the Board of Trustees. Each
Trustee serves until the next meeting of shareholders, if any, called for the
purpose of electing or reelecting such Trustee or successor to such Trustee,
and until the election and qualification of such successor, if any, or until
such Trustee sooner dies, resigns, retires or is removed by the shareholders or
two-thirds of the Trustees.
As of April ____, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Prime Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Money Market Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Treasury Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Government Fund: [update].
As of April __, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Tax-Free Fund: [update].
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
The Trust is an entity of the type commonly known as a "Delaware business
trust", which is the form in which many mutual funds are organized.
Under Delaware law, the shareholders of the Delaware Trust are not
generally subject to liability for the debts or obligations of the Delaware
Trust. Similarly, Delaware law provides that a Fund will not be liable for the
debts or obligations of any other series of the Delaware Trust. However, no
similar statutory or other authority limiting business trust shareholder
liability
44
<PAGE>
exists in many 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 of the Delaware Trust contains 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 Fund or the Trustees. The Declaration
of Trust of the Delaware Trust provides for indemnification by the relevant
Fund for any loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of Trust of the Delaware Trust also provides that a Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy and judgment
thereon. In view of the above, the risk of personal liability of shareholders
is remote.
On any matter submitted to a vote of the Shareholders of the Trust, all Shares
shall be voted in the aggregate not by individual Fund or Class, except (a)
when required by the 1940 Act, Shares shall be voted by individual Fund or
Class, and (b) when the Trustees have determined that the matter affects the
interests of only one or more Fund or Class, then only the Shareholders of all
such Fund or Classes shall be entitled to vote. As determined by the Trustees
without the vote or consent of Shareholders, on any matter submitted to a vote
of Shareholders, either (i) each whole Share shall be entitled to one vote as
to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote or (ii) each dollar of Net Asset
Value (number of Shares owned times Net Asset Value per share of such Fund or
Class, as applicable) shall be entitled to one vote on any matter on which such
Shares are entitled to vote and each fractional dollar amount shall be entitled
to a proportionate fractional vote. There is no cumulative voting in the
election of Trustees.
In connection with the establishment of one or more Funds or Classes, the
Trustees establishing such Funds or Class may appoint, to the extent permitted
by the Delaware Business Trust Act, separate Trustees with respect to such
Funds or Classes (the "Series Trustees"). Series Trustees may, but are not
required to, serve as Trustees of the Trust or any other Fund or Class of the
Trust. To the extent provided by the Trustee in the appointment of Series
Trustees, the Series Trustees may have, to the exclusion of any other Trustees
of the Trust, all the powers and authorities of Trustees with respect to such
Fund or Class, but may have no power or authority with respect to any other
Fund or Class. Shareholders for a Fund or Class with respect to which Series
Trustees have been appointed shall only be entitled to vote in the election of
such Series Trustees.
Upon the vote of a majority of the Shares Outstanding and entitled to vote of
the Trust or of each Fund to be affected, the
45
<PAGE>
Trustees may (i) sell and convey all or substantially all of the assets of all
Funds or any affected Fund or to another entity which is an open-end investment
company as defined in the 1940 Act, or is a Fund thereof, for adequate
consideration, which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any
affected Fund, and which may include shares of or interests in such Fund,
entity, or Fund thereof; or (ii) at any time sell and convert into money all or
substantially all of the assets of all Funds or any affected Fund. The
Trustees may take any of the actions specified above without obtaining the vote
of a majority of the outstanding Shares of the Trust or any Fund if a majority
of the Trustees determines, in their sole discretion, that the continuation of
the Trust or Fund is not in the best interests of the Trust, such Fund, or
their respective Shareholders. Also, the Trustees may, without shareholder
approval unless such approval is required by applicable federal law, (i) cause
the Trust to merge or consolidate with or into one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a Fund thereof, (ii) cause the Shares
to be exchanged under or pursuant to any state or federal statute to the extent
permitted by law, or (iii) cause the Trust to incorporate under the laws of
Delaware or any other U.S. jurisdiction. The Trustees may, without Shareholder
approval, invest all or a portion of the assets of any Fund, or dispose of all
or a portion of the assets of any Fund, and invest the proceeds of such
disposition in interests issued by one or more other investment companies
registered under the Investment Company Act. The Trustees may, without
Shareholder approval unless such approval is required by applicable law, cause
a Fund that is organized in the master/feeder fund structure to withdraw or
redeem into assets from the master fund and cause such Fund to invest its
assets directly in securities and other financial instruments or in another
master fund.
In addition to the requirements set forth in Section 3816 of the Delaware
Business Trust Act, the Declaration of Trust provides that a Shareholder may
bring a derivative action on behalf of the Trust only if the following
conditions are met:
(a) Shareholders eligible to bring such derivative action under the
Delaware Business Trust Act who hold at least 10% of the Outstanding Shares of
the Trust, or 10% of the Outstanding Shares of the Fund or Class to which such
action relates, shall join in the request of the Trustees to commence such
action; and
(b) the Trustees may be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such claim.
The Trustees shall be entitled to retain counsel or other advisors in
considering the merits of the request and shall require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
46
<PAGE>
such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust of the Delaware 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.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act
as custodian of the Funds' assets and, in that capacity, maintains the
accounting records and calculates the daily net asset value per share of each
Fund. Its mailing address is P.O. Box 1713, Boston, MA 02105. State Street
has appointed The Northern Trust Company, 50 South LaSalle Street, Chicago,
Illinois 60675 as subcustodian to hold cash and certain securities purchased by
the Funds.
INDEPENDENT ACCOUNTANTS
________________, independent public accounts, One International Place, 100
Oliver Street, Boston, Massachusetts 02110, have been selected as auditors of
the Trust. In addition to audit services, __________________ prepares each
Fund's federal and state tax returns, and provides consultation and assistance
on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Funds then in existence and conducting
investment operations, including the Statements of Investments as of December
31, 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 December 31, 1996 Annual Report
to the shareholders, are attached hereto and incorporated by reference into
this Statement of Additional Information.
47
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
Moody's applies numerical modifiers, 1, 2, and 3 in the Aa category. The
modifier 1 indicates that the obligation ranks in the higher end of the Aa
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the Aa category.
- ----------------------------------------------------------------
* The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the Portfolios' taxable year end.
A-1
<PAGE>
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term
promissory obligations. Prime-1 or P-1 repayment ability will normally be
evidenced by many of the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on
debt and ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the
short run. Symbols used will be as follows:
MIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2 -- This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand feature.
Such ratings will be designated as VMIG to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to the
fact
A-2
<PAGE>
that the source of payment may be limited to the external liquidity with no or
limited legal recourse to the issuer in the event the demand is not met VMIG-1,
and VMIG-2 ratings carry the same definitions as MIG-1, and MIG-2,
respectively.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
PLUS (+) OR MINUS (-): The AA rating may be modified by the addition of a
plus or minus sign to show relative standing within the AA category.
Short-Term Ratings
- ------------------
A-1: Standard & Poor's Commercial Paper ratings are current assessments of
the likelihood of timely payment of debt considered short-term in the relevant
market. The A-1 designation is the highest category and indicates that the
degree of safety regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are denoted with a plus
( + ) sign designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Municipal Notes
- ---------------
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will likely receive
a note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
. 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:
A-3
<PAGE>
SP-1 -- Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for
example, "AAA/A-1+"). With short-term demand debt, S&P's note rating symbols
are used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: Long-term fixed income securities which are rated AAA are judged to
be of the highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA: Long-term fixed income securities which are rated AA are judged to be
of high credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
Duff & Phelps applies modifiers, AA+ and AA- in the AA category for long-term
fixed securities. The modifier AA+ indicates that the security ranks in the
higher end of the AA category: the modifier AA indicates a mid-range ranking;
and the modifier AA- indicates that the issue ranks in the lower end of the AA
category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are considered excellent and are supported by strong fundamental protection
factors. Risk factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing
A-4
<PAGE>
requirements, access to capital markets is good and risk factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+, D-1 and D-1- in the
Duff 1 top grade category for commercial paper and certificates of deposit.
The rating D-1+ indicates that the security has the highest certainty of timely
payment, short-term liquidity is clearly outstanding and safety is just below
risk-free U.S. Treasury short-term obligations; the rating D-1 indicates a very
high certainty of timely payment, liquidity factors are excellent and risk
factors are minimal; and the rating D-1- indicates a high certainty of timely
payment, liquidity factors are strong and risk factors are very small.
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay its obligations, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated "F-1+".
Fitch applies plus (" + ") and minus (" - ") modifiers in the AA category to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA- .
Eligible Fitch ratings for short-term debt obligations payable on demand or
with original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes
may be rated F-1 or F-2.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A-5
<PAGE>
A1: Short-term obligations rated A1 are supported by a very strong
capacity for timely repayment. A plus ("+") sign is added to those issues
determined to possess the highest capacity for timely payment.
A2: Short-term obligations rated A2 are supported by a strong capacity for
timely repayment, although such capacity may be susceptible to adverse changes
in business, economic or financial conditions.
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates a superior ability to repay principal
and interest on a timely basis is very high.
AA: The second highest category; indicates a superior ability to repay
principal and interest on a timely basis with limited incremental risk versus
issues rated in the highest category.
Ratings in the AA Long-Term Debt category may include a plus (+) or minus (-)
designation which indicates where within the respective category the issue is
placed.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated "TBW-1".
A-6
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1997
FST ADMINISTRATION SHARES
- --------------------------------------------------------------------------------
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management investment
company (or mutual fund) which includes the Financial Square Funds. This
Statement of Additional Information relates solely to the offering of FST
Administration Shares of Financial Square Prime Obligations Fund ("Prime
Obligations Fund"), Financial Square Money Market Plus Fund ("Plus Fund"),
Financial Square Money Market Fund ("Money Market Fund"), Finan cial Square
Treasury Obligations Fund ("Treasury Obligations Fund"), Financial Square
Treasury Instruments Fund ("Treasury Instruments Fund"), Financial Square
Government Fund ("Government Fund"), Financial Square Federal Fund ("Federal
Fund"), Financial Square Tax-Free Money Market Fund ("Tax-Free Fund") and Finan
cial Square Municipal Money Market Fund ("Municipal Fund") (indi vidually, a
"Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser . Goldman Sachs serves as the Funds' distributor and transfer
agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corpo rate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset alloca tion, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority that
Goldman Sachs places on serving clients' interests. As Goldman Sachs clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, service organizations can call their AA through a toll-free number to
place purchase or redemption orders or obtain Fund and account information. The
AA can also answer inquiries about rates of return and portfolio composition and
holdings, and guide service organizations through operational details. A
Goldman Sachs client can also utilize the SMART(SM) personal computer software
system which allows shareholders to purchase or redeem shares and also obtain
Fund and account information directly.
<PAGE>
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectuses relating to FST Administration Shares
dated May 1, 1997, a copy of which may be obtained without charge from Service
Organizations, as defined herein, or by calling Goldman Sachs at 800-621-2550 or
by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
-----------
Investment Policies and Practices of the Funds.. 4
Investment Limitations.......................... 17
Trustees and Officers........................... 21
The Adviser, Distributor
and Transfer Agent............................. 27
Portfolio Transactions.......................... 30
Net Asset Value................................. 32
Redemptions..................................... 34
Calculation of Yield Quotations................. 35
Tax Information................................. 38
Organization and Capitalization................. 42
Custodian and Subcustodian...................... 47
Independent Accountants......................... 47
Financial Statements............................ 47
Administration Plan............................. 48
Appendix A (Description of Securities Ratings).. A-1
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
- --------------------------
Each Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.
CUSTODIAL RECEIPTS
- ------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank
on behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). Although
custodial receipts are not considered U.S. Government securities for certain
securities law purposes, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities.
BANK AND CORPORATE OBLIGATIONS
- ------------------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. The commercial paper
purchased by the Funds consists of direct U.S. dollar denominated obligations
of domestic, or in the case of the Money Market and Plus Funds, foreign
issuers. Bank obligations in which the Funds may invest include certificates
of deposit, bankers' acceptances, fixed time deposits and bank notes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect,
4
<PAGE>
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.
Prime Obligations Fund, Plus Fund and Money Market Fund may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements
will also guarantee the return of principal and may guarantee a stream of
payments over time. A funding agreement has a fixed maturity date and may have
either a fixed rate or variable interest rate that is based on an index and
guaranteed for a set time period. Because there is no secondary market for
these investments, any such funding agreement purchased by a Fund will be
regarded as illiquid.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund (other than Treasury Instruments Fund) may only enter into repurchase
agreements with primary dealers in U.S. Government Securities. A repurchase
agreement is an arrangement under which the purchaser (i.e., the Fund)
purchases a U.S. Government security or other high quality short-term debt
obligation (the "Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Funds' custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the Funds,
that utilize them. Such risks are not unique to the Funds but are inherent in
repurchase agreements. The Funds seek to minimize such risks by, among others,
the means indicated below, but because of the inherent legal uncertainties
5
<PAGE>
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 federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the Obligation.
It is not clear whether for other purposes a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by a Fund or as being collateral for a loan by the Fund to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller of
the Obligation, a court holds that a Fund does not have a perfected security
interest in the Obligation, a Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As
an unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. To minimize this risk, the
Funds utilize custodians and subcustodians that the Adviser believes follow
customary securities industry practice with respect to repurchase agreements,
and the Adviser analyzes the creditworthiness of the obligor, in this case the
seller of the Obligation. But because of the legal uncertainties, this risk,
like others associated with repurchase agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Such a delay may involve loss of interest or
a decline in the price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the Obligation subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that
the market value of all securities subject to the repurchase agreement equals
or exceeds the repurchase price.
Certain repurchase agreements which mature in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such
repurchase agreements will be regarded as liquid instruments.
In addition, the Funds, (other than the Treasury Instruments Fund) together
with other registered investment companies having management agreements with
the Adviser or any of its affiliates, may transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
- ------------------
Money Market Fund and Plus Fund may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Tax-Free Fund
and Municipal Fund may also invest in municipal instruments backed by letters
of credit issued by certain of such banks. Under current Securities and
Exchange Commission ("SEC") rules relating to the use of the amortized cost
method of portfolio securities valuation, Money Market Fund and Plus Fund are
restricted to purchasing U.S. dollar denominated securities, but they are not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against
a foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
- ----------------------------------------------
Each of Prime Obligations Fund, Money Market Fund and Plus Fund may invest in
asset-backed and receivables-backed securities. Asset-backed and
receivables-backed securities represent participations in, or are secured by
and payable from, pools of assets such as motor vehicle installment sale
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (credit card) agreements,
corporate securities and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution, or other
credit enhancements may be present. The value of a Fund's investments in
asset-backed and receivables-backed securities may be adversely affected by
prepayment of the underlying obligations. In addition, the risk of prepayment
may cause the value of these investments to be more volatile than a Fund's
other investments.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective
7
<PAGE>
investment objective and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. This
Statement of Additional Information will be amended or supplemented as
necessary to reflect the Prime Obligations, Money Market and Plus Funds'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, the Funds will generally not invest in an asset-backed security if the
income received with respect to such investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments in response to interest rate fluctuations.
As set forth above, several types of asset-backed and receivables-backed
securities have already been offered to investors, including, for example,
Certificates for Automobile Receivablessm ("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
8
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to make payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor or servicer. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
losses results from payment of the insurance obligations on at least a portion
of the assets in the pool. This protection may be provided through guarantees,
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transactions or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information reflecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the value of or return on an investment in such a security.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments could require
Prime Obligations, Money Market or Plus Fund to dispose of any of their
respective existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be
traded over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered
to the Fund on the settlement date. The Fund may realize a capital gain or
loss in connection with these transactions distributions from which would be
taxable to its shareholders. For purposes of determining the Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Fund's custodian or subcustodian will maintain in a segregated account cash
or liquid assets, as
9
<PAGE>
applicable by law having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
to sell portfolio securities subject to such commitment, the custodian or
subcustodian will hold the portfolio securities in a segregated account while
the commitment is outstanding. These procedures are designed to ensure that
the Fund will maintain sufficient assets at all times to cover its obligations
under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable amount master demand notes. These obligations permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between a Fund, as lender, and the borrower. Variable
amount master demand notes are direct lending arrangements between the lender
and borrower and are not generally transferable nor are they ordinarily rated.
A Fund may invest in them only if the Adviser believes that the notes are of
comparable quality to the other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
- --------------------------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable and floating rate demand instruments that are tax exempt
municipal obligations or other debt securities that possess a floating or
variable interest rate adjustment formula. These instruments permit a Fund to
demand payment of the principal balance plus unpaid accrued interest upon a
specified number of days' notice to the issuer or its agent. The demand
feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a Fund may
purchase provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer
unless a Fund instructs otherwise. The Trust, on behalf of a Fund, intends to
exercise the demand only (1) upon a default under the terms of the debt
security, (2) as needed to provide liquidity to a Fund, (3) to maintain the
respective quality standards of a Fund's investment portfolio, or (4) to attain
a more optimal portfolio structure. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. To be eligible
for purchase of a Fund, a variable or floating rate
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demand instrument which is unrated must have quality characteristics similar to
those of other obligations in which the Fund may invest. The Adviser may
determine that an unrated variable or floating rate demand instrument meets a
Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for a Fund. Thus,
either the credit of the issuer of the obligation or the guarantor bank or both
will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held by a Fund
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The acquisition of variable or floating rate demand notes for
a Fund must also meet the requirements of rules issued by the SEC applicable to
the use of the amortized cost method of securities valuation. The Funds will
also consider the liquidity of the market for variable and floating rate
instruments and in the event that such instruments are illiquid, the Funds'
investments in such instruments will be subject to the limitation on illiquid
securities.
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
Fund and Federal Funds) may invest in participation interests in variable or
floating rate tax-exempt obligations held by financial institutions (usually
commercial banks). Such participation interests provide a Fund with a specific
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of its proportional interest in the unpaid principal balance
plus accrued interest from the financial institution upon a specific number of
days' notice. In addition, the participation interest generally is backed by
an irrevocable letter of credit or guarantee from the institution. The
financial institution usually is entitled to a fee for servicing the obligation
and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
- ----------------------------------------
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended ("1933 Act"),
including restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of the value of its net assets in securities which are illiquid,
which includes fixed time deposits and repurchase agreements maturing in more
than seven days that cannot be traded on a secondary market and restricted
securities, unless, in the case of restricted securities, the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are liquid. The
Board of Trustees may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring liquidi-
11
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ty of restricted securities. The Board of Trustees, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board of
Trustees will carefully monitor each Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MUNICIPAL OBLIGATIONS
- ---------------------
Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund and
Municipal Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
Notes. Municipal notes are generally used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of
the issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation
notes are sold to provide interim financing in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or
agency thereof. The Funds which invest in municipal obligations may also
acquire securities in the form of custodial receipts which evidence ownership
of future interest payments, principal payments or both on certain state and
local governmental and authority obligations where, in the opinion of bond
counsel, interest payments with respect to such custodial receipts are excluded
from gross income for
12
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federal income tax purposes. Such obligations are held in custody by a bank on
behalf of the holders of the receipts. These custodial receipts are known by
various names, including "Municipal Receipts" ("MRs") and "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS"). There are a
number of other types of notes issued for different purposes and secured
differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of
public projects including the construction or improvement of schools, highways
and roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds, the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Tax-Free Fund does not intend to invest in
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<PAGE>
private activity bonds if the interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds. The
serial bonds which the Funds may purchase are limited to short-term serial
bonds--those with original or remaining maturities of thirteen months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Funds may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Fund's commitment to put
the bond back to the issuer at par at a designated time within thirteen months
and the issuer's commitment to so purchase the bond at such price and time.
The Funds which invest in municipal obligations may invest in tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the bond, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults by, or a
significant downgrading in the credit rating assigned to, the issuer of the
bond.
The tender option will be taken into consideration in determining the maturity
of tender option bonds and the average portfolio maturity of each Fund. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity.
Consequently, tender option bonds are deemed to be liquid unless, in the
opinion of the Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the relevant Fund's credit quality
requirements, to be inadequate.
Although Tax-Free Fund and Municipal Fund intend to invest in tender option
bonds the interest on which will, in the opinion of counsel for the issuer and
sponsor or counsel selected by the Adviser, be excluded from gross income for
federal income tax
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<PAGE>
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
A similar risk exists for certain other investments subject to puts or similar
rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. Tax-Free Fund and Municipal Fund intend to
manage their respective portfolios in a manner designed to eliminate or
minimize any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds, there
are a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
Tax-Free Fund and Municipal Fund may purchase municipal instruments that are
backed by letters of credit issued by foreign banks that have a branch, agency
or subsidiary in the United States. Such letters of credit, like other
obligations of foreign banks, may involve credit risks in addition to those of
domestic obligations, including risks relating to future political and economic
developments, nationalization, foreign governmental restrictions such as
exchange controls and difficulties in obtaining or enforcing a judgment against
a foreign bank (including branches).
For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal obligations that are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the 1933 Act prior to offer and sale, unless an exemption from such
registration is available, municipal obligations which are not publicly offered
may nevertheless be readily marketable. A secondary market may exist for
municipal obligations which were not publicly offered initially.
Municipal obligations purchased for a Fund are subject to the policy on
holdings of securities which are not readily marketable contained in the Fund's
Prospectus. The Adviser determines whether a municipal obligation is liquid
based on whether it may be sold in a reasonable time consistent with the
customs of the
15
<PAGE>
municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its value. The Adviser believes that the quality standards
applicable to each Fund's investments enhance liquidity. In addition, standby
commitments and demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including money
market conditions, municipal bond market conditions, the size of a particular
offering, the maturity of the obligation and the quality of the issue. High
quality municipal obligations tend to have a lower yield than lower rated
obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
STANDBY COMMITMENTS
- -------------------
In order to enhance the liquidity, stability or quality of municipal
obligations, Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free
Fund and Municipal Fund may each acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment", depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from the
Fund. The right to sell may be exercisable on demand or at specific
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Adviser will look to the creditworthiness of the party providing the Fund with
the right to sell.
The Funds each value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments
is expected to approximate such amortized cost. No value is assigned to the
standby commitments for purposes of determining the Fund's net asset value.
Since the value of a standby commitment is dependent on the ability of the
standby commitment writer to meet its obligation to repurchase, the policy of
each Fund that may enter into such transactions is
16
<PAGE>
to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Fund.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The Internal Revenue
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers, and which are applicable only to
the taxpayer requesting the ruling and which have, on occasion, been reversed
by the Internal Revenue Service) to the effect that they are considered the
owners of the municipal obligations subject to standby commitments so that the
interest on such instruments will be tax-exempt income to them. The Internal
Revenue Service has subsequently announced that it will not ordinarily issue
advance letter rulings as to the identity of the true owner of property in
cases involving the sale of securities or participation interests therein if
the purchaser has the right to cause the security, or the participation
interest therein, to be purchased by either the seller or a third party. The
Tax-Free Fund and Municipal Fund each intends to take the position that it is
the owner of any municipal obligations acquired subject to a standby commitment
or acquired or held with certain other types of put rights and that its
distribution of tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt for its shareholders. There is no assurance
that standby commitments will be available to these Funds and neither Fund has
assumed that such commitments will be available under all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used
in the Prospectus and this Statement of Additional Information, means the
lesser of (1) 67% of the shares of that Fund present at a meeting if the
holders of more than 50% of the outstanding shares of that Fund are present in
person or by proxy, or (2) more than 50% of the outstanding shares of that
Fund). Investment restrictions that involve a maximum percentage of securities
or assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund, with the exception of borrowings permitted by Investment Restriction (3).
17
<PAGE>
Accordingly, the Trust may not on behalf of any Fund:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act. This restriction
does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act.
(2) purchase securities if such purchase would cause more than 25% or more in
the aggregate of the market value of the total assets of a Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, however there is no limitation
with respect to, and each Fund (other than Money Market Fund and Plus
Fund) reserves freedom of action, when otherwise consistent with its
investment policies, to concentrate its investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
obligations (other than commercial paper) issued 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. Each of Money Market Fund and Plus Fund may
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements and securities loans collateralized by such obligations and
will invest more than 25% of its total assets in obligations issued or
guaranteed by banks (whether foreign or domestic) and repurchase
agreements and securities loans collateralized by such obligations.
However, if adverse economic conditions prevail in the banking industry,
each of Money Market Fund and Plus Fund may, for defensive purposes,
temporarily invest less than 25% of the value of its total assets in 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.
(3) borrow money, except (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through reverse repurchase agreement in
amounts up to 331/3% 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, and (d) the Fund may
purchase securities on margin to the extent permitted by applicable law.
18
<PAGE>
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each Funds 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 a 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.
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 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 Board of Trustees
of the Trust has adopted the following non-fundamental policies which may be
changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on the behalf of any Fund:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a 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 exceed 5%
of its net assets.
(d) make short sales of securities, except short sales against the box.
Pursuant to SEC Rule 2a-7, under the Investment Company Act, each fund may not
invest more than 5% of its total assets (taken at
19
<PAGE>
amortized cost) 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). A Fund 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. Each Fund, other than
the Tax-Free Fund and Municipal Fund, may only purchase "First Tier Securities"
as defined below. Securities which are rated in the highest short-term rating
category by at least two Nationally Recognized Statistical Rating Organizations
("NRSROs"), or if only one NRSRO has assigned a rating by that NRSRO, are
"First Tier Securities". Securities rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a rating,
by that NRSRO, but which are not First Tier Securities, are "Second Tier
Securities". Pursuant to SEC Rule 2a-7 the foregoing operating policies are
not applicable to Tax-Free Fund and Municipal Fund. With respect to 75% of
each Fund's assets, not more than 10% of such Fund's total assets may be
invested in securities issued by or subject to demand features or guarantees
from the same issuer. A Tax-Exempt Fund's investment in conduit securities
(Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier securities are limited to 5% of the
Fund's total assets (1% per issuer). "NRSROs" include Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps, Inc., Fitch
Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc., and Thomson
BankWatch, Inc. For a description of their rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities"
shall mean securities issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Board of Trustees and officers of the Trust is
set forth below. Trustees and officers deemed to be "interested persons" of
the Trust for purposes of the Investment Company Act are indicated by an
asterisk.
20
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------
Ashok N. Bakhru, 53 Chairman Executive Vice President -
1325 Ave. of Americas & Trustee Finance and Administration and
NY, NY 10019 Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (since June 1994) Retired.
Senior Vice President of Scott Paper
until June 1994 Company; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the
Walnut Street Theater.
*David B. Ford, 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 Goldman Sachs Asset
Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
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 Goldman
Sachs Asset Management (since
November 1995); Limited Partner of
21
<PAGE>
Goldman Sachs (1994 to November
1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation Bryn
Mawr, PA 19010 (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 York,
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).
22
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, One
Northfield Plaza 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
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
701 Morningside Drive Financial and Administrative
Lake Forest, IL 60045 Officer, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October
1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs
Funds Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
23
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Management
New York, NY (since February 1994); Vice
10004 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
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
24
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset
Management (since 1993); Funds
Trading Assistant, GSAM (1993-1995);
Compliance Analyst, Prudential
Insurance (1991-1993).
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 ___,
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.
25
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
______________
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
26
<PAGE>
THE ADVISER, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
- -----------
GSAM, a separate operating division of Goldman Sachs, acts as the investment
adviser to the Funds. Under the Management Agreement between Goldman Sachs and
the Trust on behalf of the Funds, GSAM, subject to the supervision of the Board
of Trustees of the Trust and in conformity with the stated policies of each
Fund, acts as investment adviser and directs the investments of the Funds. In
addition, GSAM administers the Funds' 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 .205% of each Fund's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, advisory fees,
taxes, interest, brokerage and litigation, indemnification and other
extraordinary expenses) of each Fund, on an annualized basis, to .01% of the
average daily net assets of that Fund. The amount of such reductions or limits,
if any, are calculated monthly and are based on the cumulative difference
between a Fund's estimated annualized expense ratio and the expense limit for
that Fund. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Fund's
annual total operating expenses (excluding fees of Service Organizations ) to
.18% of average daily net assets.
The Trust, on behalf of each Fund, is responsible for all expenses other than
those expressly borne by GSAM under the Funds' Management Agreement. The
expenses borne by Shares of each Fund 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 Shares 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 Trust), expenses of preparing and setting in
type prospectuses, statements of additional information, proxy material,
reports and notices, the printing and distribution of the same to Shareholders
and regulatory authorities, its proportionate share of the compensation and
expenses of its "non-interest-
27
<PAGE>
ed" Trustees, and extraordinary expenses incurred by the Portfolios.
For the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994 the amount of the management fee incurred by each Fund was as follows:
Dec. 1996 Dec. 1995 Dec. 1994
--------- --------- ---------
Prime Obligations Fund 1,692,924 695,689(4)
Money Market Fund(1) 211,326 64,294
Treasury Obligations Fund 565,477 225,733(4)
Government Fund(2) 263,804 50,687(4)
Tax Free Money Market Fund(3) 25,151 0
- ------------------------------------------
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The Information presented for the period ended December 31, 1994 reflects
eleven months of operations.
GSAM has agreed that it will not impose a portion of its fee referred to above,
pursuant to applicable contracts. Had such fees been imposed, the following
additional fees would have been incurred by these Funds for the periods
indicated:
Dec. 1996 Dec. 1995 Dec. 1994
--------- ----------- ----------
Prime Obligations Fund $3,173,924 $1,609,383
Treasury Obligations Fund 1,747,326 554,447
Government Fund(2) 493,804 128,944
Money Market Fund(1) 1,059,477 482,154
Tax Free Money Market Fund(3) 270,151 53,176
- ------------------------------------------
(1) Commenced operations April 6, 1993.
(2) Commenced operations May 18, 1994.
(3) Commenced operations July 19, 1994.
The Management Agreement entered into on behalf of the Funds was most recently
approved by the Trustees, including the "non-interested" Trustees, on April 23,
1997. The Management Agreement will remain in effect until June 30, 1997 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the particular Fund (as
defined in the Investment Company Act) and, in either case, by a majority of
"non-interested" Trustees.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who has been elected or appointed as a Trustee or officer of the
Trust to serve in the capacities in which he or she has been elected and
appointed.
28
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Fund during various periods of 1996, 1995 and 1994 to the extent such expenses
would have caused each Fund'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:
12/31/96 12/31/95 1/31/94
-------- -------- -------
Prime Obligations Fund $382,318 $ -0-
Money Market Fund 420,234 N/A
Treasury Obligations 280,395 -0-
Government Fund(1) 197,008 98,125
Tax Free Money Market Fund 83,376 N/A
__________________________
(1) Commenced operations April 6, 1993
Each Fund may use any name derived from the name "Goldman Sachs" only as long
as its Management Agreement remains in effect. Each Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated with respect to any particular Fund without penalty by vote of a
majority of the Trustees or a majority of the outstanding voting securities of
that Fund or by either party upon sixty (60) days' written notice to GSAM or by
GSAM without penalty at any time on 90 days' written notice to the Trust.
In managing the Tax-Free Money Market Fund, GSAM will draw upon the extensive
research generated by Goldman Sachs' Municipal Credit Group. The Credit
Group's research team continually reviews current information regarding the
issuers of municipal and other tax-exempt securities, with particular focus on
long-term creditworthiness, short-term liquidity, debt service costs, liability
structures, and administrative and economic characteristics.
Under a previous Administration Agreement, GSAM administered each Fund's
business affairs subjet to the supervision of the Trustees. GSAM received a
separate account administration fee from the Fund with respect to such
services.
For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the amounts of account administration fees paid to GSAM by
the Funds were as follows:
Dec. 1996 Dec. 1995 Dec. 1994(4)
--------- ----------- ------------
Prime Obligations Fund $5,501,468 $2,789,597
Money Market Fund(1) 3,024,701 835,827
Treasury Obligations Fund 1,836,426 961,040
Government Fund(2) 855,927 193,154
Tax-Free Fund(3) 434,262 35,436
_______________
29
<PAGE>
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
Had fee reductions not been in effect, Government Fund would have paid
account administration fees of $223,500 for the eleven months ended December
31,1994, and Tax-Free Fund would have paid account administration fees of
$92,169 for the period from July 19, 1994 (commencement of operations) to
December 31, 1994. The Money Market and Tax-Free Funds would have paid account
administration fees of $3,028,701 and $468,262, respectively, for the period
February 1, 1995 to January 31, 1996.
THE DISTRIBUTOR AND TRANSFER AGENT
- ----------------------------------
Goldman Sachs acts as principal underwriter and distributor of each Fund's
shares pursuant to a Distribution Agreement with the Trust which was most
recently approved by the Board of Trustees on April 23, 1997. Goldman Sachs
also serves as the transfer agent of each Fund. Goldman Sachs provides
customary transfer agency services to the Funds, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, payment of dividends and
distributions and related functions. Goldman Sachs currently imposes no fees
under its transfer agency agreement.
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 ___, 1996,
Goldman Sachs and its consolidated subsidiaries had assets of approximately
$____ billion and partners' capital of $___ billion. Goldman Sachs became
registered as an investment adviser in 1981. As of March ___, 1997, Goldman
Sachs, together with its affiliates, acted as investment adviser, administrator
or distributor for approximately $___ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms. GSAM uses its best efforts to
obtain execution of portfolio transactions at prices which are advantageous to
each Fund and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, GSAM will use its best judgment in evaluating the terms of a
transaction, and will give 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
30
<PAGE>
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions,
and the reasonableness of the spread or commission, if any. Securities
purchased and sold by the Funds are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through broker-dealers and
banks acting for their own account rather than as brokers, or otherwise involve
transactions directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many types
of municipal and money market instruments. Its activities in this regard could
have some effect on the markets for those instruments which the Funds buy, hold
or sell. An order has been granted by the SEC under the Investment Company Act
which permits the Funds to deal with Goldman Sachs in transactions in certain
taxable securities in which Goldman Sachs acts as principal. As a result, the
Funds may trade with Goldman Sachs as principal subject to the terms and
conditions of such exemption.
Under the Investment Company Act, the Funds are prohibited from purchasing any
instrument of which Goldman Sachs is a principal underwriter during the
existence of an underwriting or selling syndicate relating to such instrument,
absent an exemptive order (the order referred to in the preceding paragraph
will not apply to such purchases) or the adoption of and compliance with
certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of
the Trust's assets that may be invested in any single offering. Accordingly,
in view of Goldman Sachs' active role in the underwriting of debt securities, a
Fund's ability to purchase debt securities in the primary market may from time
to time be limited.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another fund of the Trust or one or more of
the other clients of GSAM. Investment decisions for each Fund and for GSAM's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security 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
31
<PAGE>
allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security in a particular transaction as far as a
Fund is concerned. Each Fund believes that over time its ability to
participate in volume transactions will produce better executions for the
Funds.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: [insert names]
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund and
Treasury Obligations Fund) is determined by the Funds' custodian as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New
York time) (in the case of the Government Fund and Treasury Obligations Fund,
net asset value is determined at 5:00 p.m. New York time) on each Business Day.
A Business Day means any day on which the New York Stock Exchange is open,
except for days on which banks in Chicago, Boston or New York are closed on
local holidays. Such holidays include: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $1.00 per
share, which the Trustees has determined to be in the best interests of each
Fund and its shareholders. 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 certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a
Fund would receive if it sold the instrument. During such periods, the yield
to an investor in a Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of the Funds may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Fund on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.
32
<PAGE>
The Trustees has established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio by the Trustees, at such intervals as it deems appropriate, to
determine whether such Fund's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per share based on amortized cost, as well as
review of the methods used to calculate the deviation. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any,
will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it will take such corrective action as
it regards to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00 the Trustees has the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends. Each Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no return is earned, would tend to
lower the yield on such Fund's shares.
In order to continue to use the amortized cost method of valuation each Fund's
investments, including repurchase agreements, must be U.S. dollar-denominated
instruments which the Trustees determines present minimal credit risks and
which are at the time of acquisition rated by the requisite number of NRSROs in
one of the two highest short-term rating categories or, in the case of any
instrument that is not so rated, of comparable quality as determined by GSAM.
Also, each Fund must maintain a dollar-weighted average portfolio maturity (not
more than ninety (90) days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share and may not purchase any instrument
with a remaining maturity of more than thirteen (13) months. However, a Fund
may also, consistent with the provisions of the above-mentioned rule, invest in
securities with a stated maturity of more than thirteen (13) months, if (i) the
security is a floating or variable rate security with certain demand and
interest rate reset features and (ii) the security, except in the case of
Tax-Free Fund and Municipal Fund, is a First Tier Security.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of credi-
33
<PAGE>
tors, will be specifically allocated to such Fund and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses are
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made. In addition,
within each Fund, FST Shares, FST Administration Shares, FST Service Shares and
FST Preferred Shares (if any) will be subject to different expense structures
(see "Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed for regular trading other than customary weekend and holiday closings
or during which trading on the New York Stock Exchange is restricted, (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable, (iii) as the SEC may by order permit for
the protection of the shareholders of the Trust or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Fund's shares.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from a Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the net asset value of the shares being redeemed. If a shareholder
receives a distribution in kind, he or she should expect to incur transaction
costs when he or she converts the securities to cash.
A FST shareholder of any Fund with balances in excess of $100 million may elect
to have a special account with State Street for the purpose of redeeming shares
from its account in that Fund by check. When State Street receives a completed
signature card and authorization form, the shareholder will be provided with 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 fractional shares will be redeemed to cover the amount of the check.
Cancelled checks will be returned to the shareholder by State Street. The Trust
and Goldman Sachs each reserves the right to waive the minimum requirement.
34
<PAGE>
The check redemption privilege enables a shareholder to receive the dividends
declared on the shares 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 an account. If the amount of a check is
greater than the value of shares held in the shareholder's account, the check
will be returned unpaid, and the shareholder may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the
availability of or terminate the check redemption privilege at any time with
respect to a particular shareholder or Service Organization in general. The
Trust and State Street reserve the right at any time to suspend the check
redemption privilege 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 the Funds.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated in accordance with a standard
method prescribed by the rules of the SEC. Under this method, the yield
quotation is based on a hypothetical account having a balance of exactly one
share at the beginning of a seven-day period.
Yield, effective yield and tax equivalent yield are calculated separately for
each class of a Fund's shares. Each class of Share is subject to different
fees and expenses and, consequently, may have differing yields for the same
period.
The yield quotation is computed as follows: the net change, exclusive of
capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest
100th of 1%. Such yield quotation shall take into account all fees that are
charged to a Fund.
Each Fund also may advertise a quotation of effective yield for a seven (7)
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding one (1) to that return, raising the sum to the 365/7 power and
subtracting one from the result, according to the following formula:
Effective Yield=[(base period return + 1)] - 1.
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<PAGE>
Treasury Instruments, Federal Tax-Free and Municipal Funds may also advertise a
tax-equivalent yield which is computed by dividing that portion of a Fund's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or return for
a stated period of time, the return for a Fund will fluctuate from time to time
and does not provide a basis for determining future returns. Return is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to a Fund. The return of each Fund may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Fund, with
respect to FST Shares, FST Administration Shares, FST Service Shares and FST
Preferred Shares for the seven-day period ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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."
36
<PAGE>
In the absence of such fee reductions, the yield, effective yield and the
tax-equivalent yield of each Fund for the same period would have been as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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%.
From time to time any Fund may publish an indication of its past performance as
measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes,
Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall Street
Journal.
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 potential benefits to be derived from
asset allocation strategies and the Goldman Sachs mutual funds that may form
part of such an asset allocation strategy. Such advertisements and information
may also include a discussion of GSAM's current economic outlook
37
<PAGE>
and domestic and international market views and recommend periodic tactical
modifications to current asset allocation strategies. Such advertisements and
information may also highlight or summarize the services that GSAM and/or its
affiliates provide in support of an asset allocation program.
TAX INFORMATION
Each Fund has qualified and has elected or intends to qualify and elect to be
treated as a separate regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
does not involve supervision of management or investment practices or policies
by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must, among
other things, (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock, securities or certain other
investments held less than three months; and (c) diversify its holdings so
that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total (gross) assets is represented by cash and cash
items (including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities limited, in respect of any
one issuer, to an amount not greater in value than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of the market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Fund, as a regulated investment company, will not be subject to federal
income tax on any of its net investment income and net realized capital gains
that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Fund
distributes at least 90% of its investment company taxable income (generally
all of its net taxable income other than "net capital gain," which is the
excess of net long-term capital gain over net short-term capital loss) for such
year, and in the case of any Fund that earns tax-exempt interest, at least 90%
of the excess of the tax-exempt interest
38
<PAGE>
it earns over certain disallowed deductions. A Fund will be subject to federal
income tax at regular corporate rates on any investment company taxable income
or net capital gain that it does not distribute for a taxable year. In order
to avoid a nondeductible 4% federal excise tax, a Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98%
of its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous
year that were not distributed in such year and on which the Fund paid no
federal income tax.
Dividends paid by a Fund from taxable net investment income (including income
attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of
net short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of shareholders. Such distributions will not
qualify for the corporate dividends-received deduction. Distributions paid by
a Fund from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of a Fund have been held by such shareholders,
and also will not qualify for the corporate dividends-received deduction. A
Fund's net realized capital gains for a taxable year are computed by taking
into account any capital loss carryforward of that Fund.
Distributions paid by Tax-Free Fund or Municipal Fund from tax-exempt interest
received by it and properly designated as "exempt-interest dividends" will
generally be exempt from regular federal income tax, provided that at least 50%
of the value of the applicable Fund's total assets at the close of each quarter
of its taxable year consists of tax-exempt obligations, i.e., obligations
described in Section 103(a) of the Code (not including shares of other
regulated investment companies that may pay exempt-interest dividends, because
such shares are not treated as tax-exempt obligations for this purpose).
Distributions paid by the other Funds from any tax-exempt interest they may
receive will not be tax-exempt, because they will not satisfy the 50%
requirement described in the preceding sentence. A portion of any tax-exempt
distributions attributable to interest on certain "private activity bonds", if
any, received by a Fund may constitute tax preference items and may give rise
to, or increase liability under, the alternative minimum tax for particular
shareholders. In addition tax-exempt distributions of a Fund may be considered
in computing the "adjusted current earnings" preference item of its corporate
shareholders in determining the corporate alternative minimum tax and the
corporate environmental tax. To the extent that a Fund invests in certain
short-term instruments, including repurchase agreements, the interest on which
is not exempt from federal income tax, any distributions of
39
<PAGE>
income from such investments will be taxable to shareholders as ordinary
income. All or substantially all of any interest on indebtedness incurred
directly or indirectly to purchase or carry shares of Tax-Free Fund or
Municipal Fund will generally not be deductible. The availability of
tax-exempt obligations and the value of these Funds may be affected by
restrictive tax legislation enacted in recent years.
In purchasing municipal obligations, Tax-Free Fund and Municipal Fund each
relies on opinions of nationally-recognized bond counsel for each issue as to
the excludability of interest on such obligations from gross income for federal
income tax purposes. Each Fund does not undertake independent investigations
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis in each share so received equal to the amount of cash
they would have received had they elected to receive cash.
Money Market Fund and/or Plus Fund may be subject to foreign withholding or
other foreign taxes with respect to its investments in certain securities of
foreign entities. These taxes may be reduced under the terms of applicable
U.S. income tax treaties in some cases, and the applicable Fund intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although neither Fund anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by either Fund,
that Fund could make an election under Code Section 853 to permit its
shareholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by the Fund in foreign
countries. In the event such an election is made, shareholders will be
required to include their pro rata share of such taxes in gross income and will
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the Code. Shareholders who are
precluded from taking such credits or deductions will nevertheless be taxed on
their pro rata share of the foreign taxes included in their gross income,
unless they are otherwise exempt from federal income tax.
Each Fund will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the Fund with
their taxpayer identification number or with certain certifications required by
the Internal Revenue Service or if the Internal
40
<PAGE>
Revenue Service or a broker notifies a Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Tax-Free Fund or Municipal Fund will
not be subject to backup withholding if the Fund reasonably estimates that at
least 95% of its distributions will be exempt interest dividends. Each Fund
may refuse to accept an application that does not contain any required taxpayer
identification number or certification that the number provided is correct or
that the investor is an exempt recipient. If the withholding provisions are
applicable, any such distributions, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisors about the applicability of the backup
withholding provisions.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder on the shareholder's
federal income tax return. The Funds will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Free Fund and the Municipal Fund, the amounts
that qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum tax.
Shareholders who received exempt-interest dividends and have not held their
shares of the applicable Fund for its entire taxable year may have designated
as tax-exempt or as a tax preference item a percentage of their distributions
which is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Fund. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in the Fund in the
shareholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Assuming that each Fund qualifies as a regulated investment company for federal
income tax purposes, each Fund, as a series of a Massachusetts business trust,
will not be subject to any income, franchise or corporate excise tax in
Massachusetts.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each shareholder who is not a U.S.
41
<PAGE>
person should consult his or her tax adviser regarding the U.S. and non-U.S.
tax consequences of ownership of shares of a Fund, including the possibility
that such a shareholder may be subject to a U.S. nonresident alien withholding
tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax
treaty) on certain distributions from a Fund or to backup withholding on
certain payments if a current IRS Form W-8 or acceptable substitute is not on
file with the Funds.
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Funds may have tax consequences for
shareholders different from those of a direct investment in the Funds'
securities. Shareholders should consult their own tax advisers concerning
these matters. For example, in such states or localities it may be appropriate
for shareholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Funds in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or exempt from intangibles tax the value of the shares of such companies
attributable to such obligations, subject to certain state-specific
requirements and/or limitations.
This discussion of the tax treatment of the Funds and their shareholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information, which are subject to change either prospectively or retroactively.
ORGANIZATION AND CAPITALIZATION
Goldman Sachs Money Market Trust was established as a Massachusetts business
trust by a Declaration of Trust dated December 6, 1978, and reorganized, as
part of Goldman Sachs Trust, as a Delaware business trust, by a Declaration of
Trust dated January 28, 1997. Each of the Funds became a series of the Trust
pursuant to a reorganization which occurred on April 30, 1997.
Each shareholder is deemed to have expressly assented and agreed to the terms
of the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of shares of beneficial
interest. The Board of Trustees has authority under the Declaration of Trust
to create and classify shares of beneficial interest in separate series without
further action by shareholders. The Declaration of Trust further authorizes
the Board of Trustees to classify or reclassify any series or portfolio of
shares into one or more
42
<PAGE>
classes. The Board of Trustees has authorized the issuance of up to four
classes of shares of each of the Funds: FST Shares, FST Service Shares, FST
Administration Shares and FST Preferred Shares.
Each FST Share, FST Administration Share, FST Service Share and FST Preferred
Share of a Fund represents an equal proportionate interest in the assets
belonging to such Fund. It is contemplated that most shares will be held in
the accounts of which the record owner is a bank or other institution acting,
directly or through an agent, as nominee for its customers who are the
beneficial owners of the shares or another organization designated by such bank
or institution. FST Shares may be purchased for accounts held in the name of
an investor or institution that is not compensated by the Fund for services
provided to the institution's investors. FST Administration Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including maintenance of
account records and processing orders to purchase, redeem and exchange FST
Administration Shares. FST Administration Shares of a Fund bear the cost of
administration fees at the annual rate of up to .25 of 1% of the average daily
net assets of such Shares. FST Preferred Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including acting directly or through an agent, as
the sole shareholder of record, maintain account records of its customers and
processing orders to purchase, redeem and exchange FST Preferred Shares. FST
Preferred Shares of a Fund bear the cost of preferred administration fees at an
annual rate of up to 0.10% of the average daily net assets of such shares. FST
Service Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and shareholder liaison services
to its customers, including maintenance of account records, processing orders
to purchase, redeem and exchange FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. FST Service
Shares of a Fund bear the cost of service fees at the annual rate of up to .50
of 1% of the average daily net assets of such Shares.
It is possible that an institution or its affiliates may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares of a Fund. In the event a Fund is
distributed by sales persons or any other persons, they may receive different
compensation with respect to different classes of shares of a Fund. FST
Administration Shares, FST Preferred Shares and FST Service Shares each have
certain exclusive voting rights on matters relating to their respective plans.
Shares of each class may be exchanged only for shares of the same class in
another Fund. Except as described above, the four classes of shares are
identical. Certain aspects of the shares may be altered, after advance
43
<PAGE>
notice to shareholders, if it is deemed necessary in order to satisfy certain
tax regulatory requirements.
Each FST Share, FST Service Share, FST Administration Share and FST Preferred
Share of a Fund is entitled to one vote per share; however, separate votes will
be taken by the Fund or class (or by more than one fund of the Trust or class
voting as a single class if similarly affected) on matters affecting only the
Fund or class (or those affected Funds or classes) or as otherwise required by
law. Shares are freely transferable and have no preemptive, subscription or
conversion rights. All shares issued and outstanding are fully paid and
non-assessable. The Declaration of Trust provides for shareholder voting only
for the election or removal of one or more Trustees, if a meeting is called for
that purpose, and for certain other designated matters. The Trust does not
generally hold annual or other meetings of shareholders. The shares of the
Trust have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so, and, in such event, the holders of the
remaining less than 50% of the shares voting for the election of Trustees will
not be able to elect any person or persons to the Board of Trustees. Each
Trustee serves until the next meeting of shareholders, if any, called for the
purpose of electing or reelecting such Trustee or successor to such Trustee,
and until the election and qualification of such successor, if any, or until
such Trustee sooner dies, resigns, retires or is removed by the shareholders or
two-thirds of the Trustees.
As of April ____, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Prime Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Money Market Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Treasury Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Government Fund: [update].
As of April __, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Tax-Free Fund: [update].
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
The Trust is an entity of the type commonly known as a "Delaware business
trust", which is the form in which many mutual funds are organized.
Under Delaware law, the shareholders of the Delaware Trust are not
generally subject to liability for the debts or obligations of the Delaware
Trust. Similarly, Delaware law provides that a Fund will not be liable for the
debts or obligations of any other series of the Delaware Trust. However, no
similar statutory or other authority limiting business trust shareholder
liability
44
<PAGE>
exists in many 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 of the Delaware Trust contains 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 Fund or the Trustees. The Declaration
of Trust of the Delaware Trust provides for indemnification by the relevant
Fund for any loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of Trust of the Delaware Trust also provides that a Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy and judgment
thereon. In view of the above, the risk of personal liability of shareholders
is remote.
On any matter submitted to a vote of the Shareholders of the Trust, all Shares
shall be voted in the aggregate not by individual Fund or Class, except (a)
when required by the 1940 Act, Shares shall be voted by individual Fund or
Class, and (b) when the Trustees have determined that the matter affects the
interests of only one or more Fund or Class, then only the Shareholders of all
such Fund or Classes shall be entitled to vote. As determined by the Trustees
without the vote or consent of Shareholders, on any matter submitted to a vote
of Shareholders, either (i) each whole Share shall be entitled to one vote as
to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote or (ii) each dollar of Net Asset
Value (number of Shares owned times Net Asset Value per share of such Fund or
Class, as applicable) shall be entitled to one vote on any matter on which such
Shares are entitled to vote and each fractional dollar amount shall be entitled
to a proportionate fractional vote. There is no cumulative voting in the
election of Trustees.
In connection with the establishment of one or more Funds or Classes, the
Trustees establishing such Funds or Class may appoint, to the extent permitted
by the Delaware Business Trust Act, separate Trustees with respect to such
Funds or Classes (the "Series Trustees"). Series Trustees may, but are not
required to, serve as Trustees of the Trust or any other Fund or Class of the
Trust. To the extent provided by the Trustee in the appointment of Series
Trustees, the Series Trustees may have, to the exclusion of any other Trustees
of the Trust, all the powers and authorities of Trustees with respect to such
Fund or Class, but may have no power or authority with respect to any other
Fund or Class. Shareholders for a Fund or Class with respect to which Series
Trustees have been appointed shall only be entitled to vote in the election of
such Series Trustees.
Upon the vote of a majority of the Shares Outstanding and entitled to vote of
the Trust or of each Fund to be affected, the
45
<PAGE>
Trustees may (i) sell and convey all or substantially all of the assets of all
Funds or any affected Fund or to another entity which is an open-end investment
company as defined in the 1940 Act, or is a Fund thereof, for adequate
consideration, which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any
affected Fund, and which may include shares of or interests in such Fund,
entity, or Fund thereof; or (ii) at any time sell and convert into money all or
substantially all of the assets of all Funds or any affected Fund. The
Trustees may take any of the actions specified above without obtaining the vote
of a majority of the outstanding Shares of the Trust or any Fund if a majority
of the Trustees determines, in their sole discretion, that the continuation of
the Trust or Fund is not in the best interests of the Trust, such Fund, or
their respective Shareholders. Also, the Trustees may, without shareholder
approval unless such approval is required by applicable federal law, (i) cause
the Trust to merge or consolidate with or into one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a Fund thereof, (ii) cause the Shares
to be exchanged under or pursuant to any state or federal statute to the extent
permitted by law, or (iii) cause the Trust to incorporate under the laws of
Delaware or any other U.S. jurisdiction. The Trustees may, without Shareholder
approval, invest all or a portion of the assets of any Fund, or dispose of all
or a portion of the assets of any Fund, and invest the proceeds of such
disposition in interests issued by one or more other investment companies
registered under the Investment Company Act. The Trustees may, without
Shareholder approval unless such approval is required by applicable law, cause
a Fund that is organized in the master/feeder fund structure to withdraw or
redeem into assets from the master fund and cause such Fund to invest its
assets directly in securities and other financial instruments or in another
master fund.
In addition to the requirements set forth in Section 3816 of the Delaware
Business Trust Act, the Declaration of Trust provides that a Shareholder may
bring a derivative action on behalf of the Trust only if the following
conditions are met:
(a) Shareholders eligible to bring such derivative action under the
Delaware Business Trust Act who hold at least 10% of the Outstanding Shares of
the Trust, or 10% of the Outstanding Shares of the Fund or Class to which such
action relates, shall join in the request of the Trustees to commence such
action; and
(b) the Trustees may be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such claim.
The Trustees shall be entitled to retain counsel or other advisors in
considering the merits of the request and shall require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
46
<PAGE>
such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust of the Delaware 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.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act
as custodian of the Funds' assets and, in that capacity, maintains the
accounting records and calculates the daily net asset value per share of each
Fund. Its mailing address is P.O. Box 1713, Boston, MA 02105. State Street
has appointed The Northern Trust Company, 50 South LaSalle Street, Chicago,
Illinois 60675 as subcustodian to hold cash and certain securities purchased by
the Funds.
INDEPENDENT ACCOUNTANTS
________________, independent public accounts, One International Place, 100
Oliver Street, Boston, Massachusetts 02110, have been selected as auditors of
the Trust. In addition to audit services, __________________ prepares each
Fund's federal and state tax returns, and provides consultation and assistance
on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Funds then in existence and conducting
investment operations, including the Statements of Investments as of December
31, 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 December 31, 1996 Annual Report
to the shareholders, are attached hereto and incorporated by reference into
this Statement of Additional Information.
47
<PAGE>
ADMINISTRATION PLAN
The Trust, on behalf of each Fund, has adopted an adminis tration plan (the
"Plan") with respect to the FST Administration Shares which authorizes the Funds
to compensate Service Organiza tions for providing certain account
administration services to their customers who are beneficial owners of such
shares. Pursuant to the Plan, the Trust, on behalf of each Fund, will enter into
agreements with Service Organizations which purchase FST Administration Shares
on behalf of their customers ("Service Agreements"). Under such Service
Agreements the Service Organi zations may: (a) act, directly or through an
agent, as the sole shareholder of record and nominee for all customers, (b)
maintain account records for each customer who beneficially owns FST
Administration Shares, (c) answer questions and handle correspon dence from
customers regarding their accounts, (d) process customer orders to purchase,
redeem and exchange FST Administra tion Shares, and handle the transmission of
funds representing the customers' purchase price or redemption proceeds, and (e)
issue confirmations for transactions in shares by customers. As compensation for
such services, each Fund will pay each Service Organization an administration
fee in an amount up to .25% (on an annualized basis) of the average daily net
assets of the FST Administration Shares of such Fund attributable to or held in
the name of such Service Organization.
For the fiscal year ended December 31, 1996, December 31, 1995 and the
eleven months ended December 31, 1994, with respect to each Fund, the amount of
administration fees paid by each Fund to Service Organizations was as
follows:
Dec.1996 Dec. 1995 Dec.
-------- --------- -----
1994
- ----
Prime Obligations Fund/(1)(6)/ $318,346 $139,235
Money Market Fund/(2)/ 283,241 78,743
Treasury Obligations Fund/(3)(6)/ 457,071 79,171
Government Fund/(4)(6)/ 131,629 83,036
Tax Free Fund/(5)/ 32,166 1,800
- ---------------
(1) FST Administration Share activity commenced November 2, 1992.
(2) FST Administration Share activity commenced May 20, 1994.
(3) FST Administration Share activity commenced January 21, 1993.
(4) FST Administration Share activity commenced September 1, 1993.
(5) FST Administration Share activity commenced August 1, 1994.
(6) The information presented for the period ended December 31, 1994 reflects
the eleven months of operations.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in FST Adminis tration Shares. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advis ers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal advisers before
investing fiduciary assets
48
<PAGE>
in FST Administration Shares. In addition, under some state securities laws,
banks and other financial institutions purchas ing FST Administration 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 such Plan or the related Service Agreements, most recently
voted to approve the Plan and Service Agreements for each Fund at a meeting
called for the purpose of voting on such Plan and Service Agreements on April
23, 1997. The Plan and Service Agreements will remain in effect until April 30,
1998 and will continue in effect thereaf ter only if such continuance is
specifically approved annually by a vote of the Board of Trustees in the manner
described above.
The Plan may not be amended to increase materially the amount to be spent
for the services described therein without approval of the FST Administration
Shareholders of each Fund, and all material amendments of the Plan must also be
approved by the Board of Trustees in the manner described above. The Plan may
be terminated at any time by a majority of the Board of Trustees as described
above or by vote of a majority of the outstanding FST Administration Shares of
each Fund. The Service Agreements may be terminated at any time, without
payment of any penalty, by vote of a majority of the Board of Trustees as
described above or by a vote of a majority of the outstanding FST Administration
Shares of each Fund on not more than sixty (60) days' written notice to any
other party to the Service Agreements. The Service Agreements shall terminate
automatically if assigned. As long as the Plan is in effect, the selection and
nomination of those Trustees who are not interested persons shall be committed
to the discretion of the Trust's Nominating Committee, which consists of all of
the non-interested members of the Board of Trustees. The Board of Trustees has
determined that, in its judgment, there is a reasonable likelihood that the Plan
will benefit each Fund and holders of FST Administration Shares of such Fund.
In the Board of Trustees' quarterly review of the Plan and Service Agreements,
the Board will consider their continued appropriateness and the level of
compensation provided therein.
49
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- ----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1997.
FST SERVICE SHARES
- ----------------------------------------------------------------
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management
investment company (or mutual fund) which includes the Financial Square Funds.
This Statement of Additional Information relates solely to the offering of FST
Service Shares of Financial Square Prime Obligations Fund ("Prime Obligations
Fund"), Financial Square Money Market Plus Fund ("Plus Fund"), Financial Square
Money Market Fund ("Money Market Fund"), Financial Square Treasury Obligations
Fund ("Treasury Obligations Fund"), Financial Square Treasury Instruments Fund
("Treasury Instruments Fund"), Financial Square Government Fund ("Government
Fund"), Financial Square Federal Fund ("Federal Fund"), Financial Square
Tax-Free Money Market Fund ("Tax-Free Fund") and Financial Square Municipal
Money Market Fund ("Municipal Fund") (individually, a "Fund" and collectively
the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate operating
division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the Funds'
investment adviser. Goldman Sachs serves as the Funds' distributor and
transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority that
Goldman Sachs places on serving clients' interests. As Goldman Sachs clients,
shareholders will be assigned an Account Administrator ("AA"), who is ready to
help shareholders with questions concerning their accounts. During business
hours, service organizations can call their AA through a toll-free number to
place purchase or redemption orders or obtain Fund and account information.
The AA can also answer inquiries about rates of return and portfolio
composition and holdings, and guide service organizations through operational
details. A Goldman Sachs client can also utilize the SMART(SM) personal
computer software system which allows shareholders to purchase or redeem shares
and also obtain Fund and account information directly.
<PAGE>
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses relating to FST Service Shares dated May
1, 1997, a copy of which may be obtained without charge from Service
Organizations, as defined herein, or by calling Goldman Sachs at 800-621-2550
or by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
Page in
Statement of
Additional
Information
-----------------
Investment Policies and Practices of the
Funds ........................................... 4
Investment Limitations................................. 17
Trustees and Officers.................................. 21
The Adviser, Distributor
and Transfer Agent............................... 27
Portfolio Transactions................................. 30
Net Asset Value........................................ 32
Redemptions............................................ 34
Calculation of Yield Quotations........................ 35
Tax Information........................................ 38
Organization and Capitalization........................ 42
Custodian and Subcustodian............................. 47
Independent Accountants................................ 47
Financial Statements................................... 47
Service Plan........................................... 48
Appendix A (Description of Securities
Ratings).........................................A-1
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
- --------------------------
Each Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.
CUSTODIAL RECEIPTS
- ------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank
on behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). Although
custodial receipts are not considered U.S. Government securities for certain
securities law purposes, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities.
BANK AND CORPORATE OBLIGATIONS
- ------------------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. The commercial paper
purchased by the Funds consists of direct U.S. dollar denominated obligations
of domestic, or in the case of the Money Market and Plus Funds, foreign
issuers. Bank obligations in which the Funds may invest include certificates
of deposit, bankers' acceptances, fixed time deposits and bank notes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect,
4
<PAGE>
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.
Prime Obligations Fund, Plus Fund and Money Market Fund may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements
will also guarantee the return of principal and may guarantee a stream of
payments over time. A funding agreement has a fixed maturity date and may have
either a fixed rate or variable interest rate that is based on an index and
guaranteed for a set time period. Because there is no secondary market for
these investments, any such funding agreement purchased by a Fund will be
regarded as illiquid.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund (other than Treasury Instruments Fund) may only enter into repurchase
agreements with primary dealers in U.S. Government Securities. A repurchase
agreement is an arrangement under which the purchaser (i.e., the Fund)
purchases a U.S. Government security or other high quality short-term debt
obligation (the "Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Funds' custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the Funds,
that utilize them. Such risks are not unique to the Funds but are inherent in
repurchase agreements. The Funds seek to minimize such risks by, among others,
the means indicated below, but because of the inherent legal uncertainties
5
<PAGE>
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 federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the Obligation.
It is not clear whether for other purposes a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by a Fund or as being collateral for a loan by the Fund to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller of
the Obligation, a court holds that a Fund does not have a perfected security
interest in the Obligation, a Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As
an unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. To minimize this risk, the
Funds utilize custodians and subcustodians that the Adviser believes follow
customary securities industry practice with respect to repurchase agreements,
and the Adviser analyzes the creditworthiness of the obligor, in this case the
seller of the Obligation. But because of the legal uncertainties, this risk,
like others associated with repurchase agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Such a delay may involve loss of interest or
a decline in the price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the Obligation subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that
the market value of all securities subject to the repurchase agreement equals
or exceeds the repurchase price.
Certain repurchase agreements which mature in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such
repurchase agreements will be regarded as liquid instruments.
In addition, the Funds, (other than the Treasury Instruments Fund) together
with other registered investment companies having management agreements with
the Adviser or any of its affiliates, may transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
- ------------------
Money Market Fund and Plus Fund may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Tax-Free Fund
and Municipal Fund may also invest in municipal instruments backed by letters
of credit issued by certain of such banks. Under current Securities and
Exchange Commission ("SEC") rules relating to the use of the amortized cost
method of portfolio securities valuation, Money Market Fund and Plus Fund are
restricted to purchasing U.S. dollar denominated securities, but they are not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against
a foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
- ----------------------------------------------
Each of Prime Obligations Fund, Money Market Fund and Plus Fund may invest in
asset-backed and receivables-backed securities. Asset-backed and
receivables-backed securities represent participations in, or are secured by
and payable from, pools of assets such as motor vehicle installment sale
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (credit card) agreements,
corporate securities and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution, or other
credit enhancements may be present. The value of a Fund's investments in
asset-backed and receivables-backed securities may be adversely affected by
prepayment of the underlying obligations. In addition, the risk of prepayment
may cause the value of these investments to be more volatile than a Fund's
other investments.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective
7
<PAGE>
investment objective and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. This
Statement of Additional Information will be amended or supplemented as
necessary to reflect the Prime Obligations, Money Market and Plus Funds'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, the Funds will generally not invest in an asset-backed security if the
income received with respect to such investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments in response to interest rate fluctuations.
As set forth above, several types of asset-backed and receivables-backed
securities have already been offered to investors, including, for example,
Certificates for Automobile Receivablessm ("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
8
<PAGE>
to make payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor or servicer. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
losses results from payment of the insurance obligations on at least a portion
of the assets in the pool. This protection may be provided through guarantees,
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transactions or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information reflecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the value of or return on an investment in such a security.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments could require
Prime Obligations, Money Market or Plus Fund to dispose of any of their
respective existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be
traded over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered
to the Fund on the settlement date. The Fund may realize a capital gain or
loss in connection with these transactions distributions from which would be
taxable to its shareholders. For purposes of determining the Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Fund's custodian or subcustodian will maintain in a segregated account cash
or liquid assets, as
9
<PAGE>
applicable by law having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
to sell portfolio securities subject to such commitment, the custodian or
subcustodian will hold the portfolio securities in a segregated account while
the commitment is outstanding. These procedures are designed to ensure that
the Fund will maintain sufficient assets at all times to cover its obligations
under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable amount master demand notes. These obligations permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between a Fund, as lender, and the borrower. Variable
amount master demand notes are direct lending arrangements between the lender
and borrower and are not generally transferable nor are they ordinarily rated.
A Fund may invest in them only if the Adviser believes that the notes are of
comparable quality to the other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
- --------------------------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable and floating rate demand instruments that are tax exempt
municipal obligations or other debt securities that possess a floating or
variable interest rate adjustment formula. These instruments permit a Fund to
demand payment of the principal balance plus unpaid accrued interest upon a
specified number of days' notice to the issuer or its agent. The demand
feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a Fund may
purchase provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer
unless a Fund instructs otherwise. The Trust, on behalf of a Fund, intends to
exercise the demand only (1) upon a default under the terms of the debt
security, (2) as needed to provide liquidity to a Fund, (3) to maintain the
respective quality standards of a Fund's investment portfolio, or (4) to attain
a more optimal portfolio structure. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. To be eligible
for purchase of a Fund, a variable or floating rate
10
<PAGE>
demand instrument which is unrated must have quality characteristics similar to
those of other obligations in which the Fund may invest. The Adviser may
determine that an unrated variable or floating rate demand instrument meets a
Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for a Fund. Thus,
either the credit of the issuer of the obligation or the guarantor bank or both
will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held by a Fund
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The acquisition of variable or floating rate demand notes for
a Fund must also meet the requirements of rules issued by the SEC applicable to
the use of the amortized cost method of securities valuation. The Funds will
also consider the liquidity of the market for variable and floating rate
instruments and in the event that such instruments are illiquid, the Funds'
investments in such instruments will be subject to the limitation on illiquid
securities.
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
Fund and Federal Funds) may invest in participation interests in variable or
floating rate tax-exempt obligations held by financial institutions (usually
commercial banks). Such participation interests provide a Fund with a specific
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of its proportional interest in the unpaid principal balance
plus accrued interest from the financial institution upon a specific number of
days' notice. In addition, the participation interest generally is backed by
an irrevocable letter of credit or guarantee from the institution. The
financial institution usually is entitled to a fee for servicing the obligation
and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
- ----------------------------------------
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended ("1933 Act"),
including restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of the value of its net assets in securities which are illiquid,
which includes fixed time deposits and repurchase agreements maturing in more
than seven days that cannot be traded on a secondary market and restricted
securities, unless, in the case of restricted securities, the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are liquid. The
Board of Trustees may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring liquidi-
11
<PAGE>
ty of restricted securities. The Board of Trustees, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board of
Trustees will carefully monitor each Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MUNICIPAL OBLIGATIONS
- ---------------------
Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund and
Municipal Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
Notes. Municipal notes are generally used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of
the issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation
notes are sold to provide interim financing in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or
agency thereof. The Funds which invest in municipal obligations may also
acquire securities in the form of custodial receipts which evidence ownership
of future interest payments, principal payments or both on certain state and
local governmental and authority obligations where, in the opinion of bond
counsel, interest payments with respect to such custodial receipts are excluded
from gross income for
12
<PAGE>
federal income tax purposes. Such obligations are held in custody by a bank on
behalf of the holders of the receipts. These custodial receipts are known by
various names, including "Municipal Receipts" ("MRs") and "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS"). There are a
number of other types of notes issued for different purposes and secured
differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of
public projects including the construction or improvement of schools, highways
and roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds, the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Tax-Free Fund does not intend to invest in
13
<PAGE>
private activity bonds if the interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds. The
serial bonds which the Funds may purchase are limited to short-term serial
bonds--those with original or remaining maturities of thirteen months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Funds may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Fund's commitment to put
the bond back to the issuer at par at a designated time within thirteen months
and the issuer's commitment to so purchase the bond at such price and time.
The Funds which invest in municipal obligations may invest in tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the bond, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults by, or a
significant downgrading in the credit rating assigned to, the issuer of the
bond.
The tender option will be taken into consideration in determining the maturity
of tender option bonds and the average portfolio maturity of each Fund. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity.
Consequently, tender option bonds are deemed to be liquid unless, in the
opinion of the Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the relevant Fund's credit quality
requirements, to be inadequate.
Although Tax-Free Fund and Municipal Fund intend to invest in tender option
bonds the interest on which will, in the opinion of counsel for the issuer and
sponsor or counsel selected by the Adviser, be excluded from gross income for
federal income tax
14
<PAGE>
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
A similar risk exists for certain other investments subject to puts or similar
rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. Tax-Free Fund and Municipal Fund intend to
manage their respective portfolios in a manner designed to eliminate or
minimize any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds, there
are a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
Tax-Free Fund and Municipal Fund may purchase municipal instruments that are
backed by letters of credit issued by foreign banks that have a branch, agency
or subsidiary in the United States. Such letters of credit, like other
obligations of foreign banks, may involve credit risks in addition to those of
domestic obligations, including risks relating to future political and economic
developments, nationalization, foreign governmental restrictions such as
exchange controls and difficulties in obtaining or enforcing a judgment against
a foreign bank (including branches).
For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal obligations that are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the 1933 Act prior to offer and sale, unless an exemption from such
registration is available, municipal obligations which are not publicly offered
may nevertheless be readily marketable. A secondary market may exist for
municipal obligations which were not publicly offered initially.
Municipal obligations purchased for a Fund are subject to the policy on
holdings of securities which are not readily marketable contained in the Fund's
Prospectus. The Adviser determines whether a municipal obligation is liquid
based on whether it may be sold in a reasonable time consistent with the
customs of the
15
<PAGE>
municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its value. The Adviser believes that the quality standards
applicable to each Fund's investments enhance liquidity. In addition, standby
commitments and demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including money
market conditions, municipal bond market conditions, the size of a particular
offering, the maturity of the obligation and the quality of the issue. High
quality municipal obligations tend to have a lower yield than lower rated
obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
STANDBY COMMITMENTS
- -------------------
In order to enhance the liquidity, stability or quality of municipal
obligations, Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free
Fund and Municipal Fund may each acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment", depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from the
Fund. The right to sell may be exercisable on demand or at specific
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Adviser will look to the creditworthiness of the party providing the Fund with
the right to sell.
The Funds each value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments
is expected to approximate such amortized cost. No value is assigned to the
standby commitments for purposes of determining the Fund's net asset value.
Since the value of a standby commitment is dependent on the ability of the
standby commitment writer to meet its obligation to repurchase, the policy of
each Fund that may enter into such transactions is
16
<PAGE>
to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Fund.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The Internal Revenue
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers, and which are applicable only to
the taxpayer requesting the ruling and which have, on occasion, been reversed
by the Internal Revenue Service) to the effect that they are considered the
owners of the municipal obligations subject to standby commitments so that the
interest on such instruments will be tax-exempt income to them. The Internal
Revenue Service has subsequently announced that it will not ordinarily issue
advance letter rulings as to the identity of the true owner of property in
cases involving the sale of securities or participation interests therein if
the purchaser has the right to cause the security, or the participation
interest therein, to be purchased by either the seller or a third party. The
Tax-Free Fund and Municipal Fund each intends to take the position that it is
the owner of any municipal obligations acquired subject to a standby commitment
or acquired or held with certain other types of put rights and that its
distribution of tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt for its shareholders. There is no assurance
that standby commitments will be available to these Funds and neither Fund has
assumed that such commitments will be available under all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used
in the Prospectus and this Statement of Additional Information, means the
lesser of (1) 67% of the shares of that Fund present at a meeting if the
holders of more than 50% of the outstanding shares of that Fund are present in
person or by proxy, or (2) more than 50% of the outstanding shares of that
Fund). Investment restrictions that involve a maximum percentage of securities
or assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund, with the exception of borrowings permitted by Investment Restriction (3).
17
<PAGE>
Accordingly, the Trust may not on behalf of any Fund:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act. This restriction
does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act.
(2) purchase securities if such purchase would cause more than 25% or more in
the aggregate of the market value of the total assets of a Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, however there is no limitation
with respect to, and each Fund (other than Money Market Fund and Plus
Fund) reserves freedom of action, when otherwise consistent with its
investment policies, to concentrate its investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
obligations (other than commercial paper) issued 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. Each of Money Market Fund and Plus Fund may
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements and securities loans collateralized by such obligations and
will invest more than 25% of its total assets in obligations issued or
guaranteed by banks (whether foreign or domestic) and repurchase
agreements and securities loans collateralized by such obligations.
However, if adverse economic conditions prevail in the banking industry,
each of Money Market Fund and Plus Fund may, for defensive purposes,
temporarily invest less than 25% of the value of its total assets in 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.
(3) borrow money, except (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through reverse repurchase agreement in
amounts up to 331/3% 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, and (d) the Fund may
purchase securities on margin to the extent permitted by applicable law.
18
<PAGE>
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each Funds 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 a 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.
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 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 Board of Trustees
of the Trust has adopted the following non-fundamental policies which may be
changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on the behalf of any Fund:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a 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 exceed 5%
of its net assets.
(d) make short sales of securities, except short sales against the box.
Pursuant to SEC Rule 2a-7, under the Investment Company Act, each fund may not
invest more than 5% of its total assets (taken at
19
<PAGE>
amortized cost) 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). A Fund 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. Each Fund, other than
the Tax-Free Fund and Municipal Fund, may only purchase "First Tier Securities"
as defined below. Securities which are rated in the highest short-term rating
category by at least two Nationally Recognized Statistical Rating Organizations
("NRSROs"), or if only one NRSRO has assigned a rating by that NRSRO, are
"First Tier Securities". Securities rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a rating,
by that NRSRO, but which are not First Tier Securities, are "Second Tier
Securities". Pursuant to SEC Rule 2a-7 the foregoing operating policies are
not applicable to Tax-Free Fund and Municipal Fund. With respect to 75% of
each Fund's assets, not more than 10% of such Fund's total assets may be
invested in securities issued by or subject to demand features or guarantees
from the same issuer. A Tax-Exempt Fund's investment in conduit securities
(Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier securities are limited to 5% of the
Fund's total assets (1% per issuer). "NRSROs" include Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps, Inc., Fitch
Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc., and Thomson
BankWatch, Inc. For a description of their rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities"
shall mean securities issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Board of Trustees and officers of the Trust is
set forth below. Trustees and officers deemed to be "interested persons" of
the Trust for purposes of the Investment Company Act are indicated by an
asterisk.
20
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------
Ashok N. Bakhru, 53 Chairman Executive Vice President -
1325 Ave. of Americas & Trustee Finance and Administration and
NY, NY 10019 Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (since June 1994) Retired.
Senior Vice President of Scott Paper
until June 1994 Company; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the
Walnut Street Theater.
*David B. Ford, 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 Goldman Sachs Asset
Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
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 Goldman
Sachs Asset Management (since
November 1995); Limited Partner of
21
<PAGE>
Goldman Sachs (1994 to November
1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation Bryn
Mawr, PA 19010 (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 York,
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).
22
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, One
Northfield Plaza 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
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
701 Morningside Drive Financial and Administrative
Lake Forest, IL 60045 Officer, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October
1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs
Funds Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
23
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Management
New York, NY (since February 1994); Vice
10004 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
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
24
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset
Management (since 1993); Funds
Trading Assistant, GSAM (1993-1995);
Compliance Analyst, Prudential
Insurance (1991-1993).
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 ___,
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.
25
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
______________
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
26
<PAGE>
THE ADVISER, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
- -----------
GSAM, a separate operating division of Goldman Sachs, acts as the investment
adviser to the Funds. Under the Management Agreement between Goldman Sachs and
the Trust on behalf of the Funds, GSAM, subject to the supervision of the Board
of Trustees of the Trust and in conformity with the stated policies of each
Fund, acts as investment adviser and directs the investments of the Funds. In
addition, GSAM administers the Funds' 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 .205% of each Fund's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, advisory fees,
taxes, interest, brokerage and litigation, indemnification and other
extraordinary expenses) of each Fund, on an annualized basis, to .01% of the
average daily net assets of that Fund. The amount of such reductions or limits,
if any, are calculated monthly and are based on the cumulative difference
between a Fund's estimated annualized expense ratio and the expense limit for
that Fund. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Fund's
annual total operating expenses (excluding fees of Service Organizations ) to
.18% of average daily net assets.
The Trust, on behalf of each Fund, is responsible for all expenses other than
those expressly borne by GSAM under the Funds' Management Agreement. The
expenses borne by Shares of each Fund 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 Shares 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 Trust), expenses of preparing and setting in
type prospectuses, statements of additional information, proxy material,
reports and notices, the printing and distribution of the same to Shareholders
and regulatory authorities, its proportionate share of the compensation and
expenses of its "non-interest-
27
<PAGE>
ed" Trustees, and extraordinary expenses incurred by the Portfolios.
For the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994 the amount of the management fee incurred by each Fund was as follows:
Dec. 1996 Dec. 1995 Dec. 1994
--------- --------- ---------
Prime Obligations Fund 1,692,924 695,689(4)
Money Market Fund(1) 211,326 64,294
Treasury Obligations Fund 565,477 225,733(4)
Government Fund(2) 263,804 50,687(4)
Tax Free Money Market Fund(3) 25,151 0
- ------------------------------------------
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The Information presented for the period ended December 31, 1994 reflects
eleven months of operations.
GSAM has agreed that it will not impose a portion of its fee referred to above,
pursuant to applicable contracts. Had such fees been imposed, the following
additional fees would have been incurred by these Funds for the periods
indicated:
Dec. 1996 Dec. 1995 Dec. 1994
--------- ----------- ----------
Prime Obligations Fund $3,173,924 $1,609,383
Treasury Obligations Fund 1,747,326 554,447
Government Fund(2) 493,804 128,944
Money Market Fund(1) 1,059,477 482,154
Tax Free Money Market Fund(3) 270,151 53,176
- ------------------------------------------
(1) Commenced operations April 6, 1993.
(2) Commenced operations May 18, 1994.
(3) Commenced operations July 19, 1994.
The Management Agreement entered into on behalf of the Funds was most recently
approved by the Trustees, including the "non-interested" Trustees, on April 23,
1997. The Management Agreement will remain in effect until June 30, 1997 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the particular Fund (as
defined in the Investment Company Act) and, in either case, by a majority of
"non-interested" Trustees.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who has been elected or appointed as a Trustee or officer of the
Trust to serve in the capacities in which he or she has been elected and
appointed.
28
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Fund during various periods of 1996, 1995 and 1994 to the extent such expenses
would have caused each Fund'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:
12/31/96 12/31/95 1/31/94
-------- -------- -------
Prime Obligations Fund $382,318 $ -0-
Money Market Fund 420,234 N/A
Treasury Obligations 280,395 -0-
Government Fund(1) 197,008 98,125
Tax Free Money Market Fund 83,376 N/A
__________________________
(1) Commenced operations April 6, 1993
Each Fund may use any name derived from the name "Goldman Sachs" only as long
as its Management Agreement remains in effect. Each Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated with respect to any particular Fund without penalty by vote of a
majority of the Trustees or a majority of the outstanding voting securities of
that Fund or by either party upon sixty (60) days' written notice to GSAM or by
GSAM without penalty at any time on 90 days' written notice to the Trust.
In managing the Tax-Free Money Market Fund, GSAM will draw upon the extensive
research generated by Goldman Sachs' Municipal Credit Group. The Credit
Group's research team continually reviews current information regarding the
issuers of municipal and other tax-exempt securities, with particular focus on
long-term creditworthiness, short-term liquidity, debt service costs, liability
structures, and administrative and economic characteristics.
Under a previous Administration Agreement, GSAM administered each Fund's
business affairs subjet to the supervision of the Trustees. GSAM received a
separate account administration fee from the Fund with respect to such
services.
For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the amounts of account administration fees paid to GSAM by
the Funds were as follows:
Dec. 1996 Dec. 1995 Dec. 1994(4)
--------- ----------- ------------
Prime Obligations Fund $5,501,468 $2,789,597
Money Market Fund(1) 3,024,701 835,827
Treasury Obligations Fund 1,836,426 961,040
Government Fund(2) 855,927 193,154
Tax-Free Fund(3) 434,262 35,436
_______________
29
<PAGE>
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
Had fee reductions not been in effect, Government Fund would have paid
account administration fees of $223,500 for the eleven months ended December
31,1994, and Tax-Free Fund would have paid account administration fees of
$92,169 for the period from July 19, 1994 (commencement of operations) to
December 31, 1994. The Money Market and Tax-Free Funds would have paid account
administration fees of $3,028,701 and $468,262, respectively, for the period
February 1, 1995 to January 31, 1996.
THE DISTRIBUTOR AND TRANSFER AGENT
- ----------------------------------
Goldman Sachs acts as principal underwriter and distributor of each Fund's
shares pursuant to a Distribution Agreement with the Trust which was most
recently approved by the Board of Trustees on April 23, 1997. Goldman Sachs
also serves as the transfer agent of each Fund. Goldman Sachs provides
customary transfer agency services to the Funds, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, payment of dividends and
distributions and related functions. Goldman Sachs currently imposes no fees
under its transfer agency agreement.
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 ___, 1996,
Goldman Sachs and its consolidated subsidiaries had assets of approximately
$____ billion and partners' capital of $___ billion. Goldman Sachs became
registered as an investment adviser in 1981. As of March ___, 1997, Goldman
Sachs, together with its affiliates, acted as investment adviser, administrator
or distributor for approximately $___ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms. GSAM uses its best efforts to
obtain execution of portfolio transactions at prices which are advantageous to
each Fund and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, GSAM will use its best judgment in evaluating the terms of a
transaction, and will give 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
30
<PAGE>
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions,
and the reasonableness of the spread or commission, if any. Securities
purchased and sold by the Funds are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through broker-dealers and
banks acting for their own account rather than as brokers, or otherwise involve
transactions directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many types
of municipal and money market instruments. Its activities in this regard could
have some effect on the markets for those instruments which the Funds buy, hold
or sell. An order has been granted by the SEC under the Investment Company Act
which permits the Funds to deal with Goldman Sachs in transactions in certain
taxable securities in which Goldman Sachs acts as principal. As a result, the
Funds may trade with Goldman Sachs as principal subject to the terms and
conditions of such exemption.
Under the Investment Company Act, the Funds are prohibited from purchasing any
instrument of which Goldman Sachs is a principal underwriter during the
existence of an underwriting or selling syndicate relating to such instrument,
absent an exemptive order (the order referred to in the preceding paragraph
will not apply to such purchases) or the adoption of and compliance with
certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of
the Trust's assets that may be invested in any single offering. Accordingly,
in view of Goldman Sachs' active role in the underwriting of debt securities, a
Fund's ability to purchase debt securities in the primary market may from time
to time be limited.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another fund of the Trust or one or more of
the other clients of GSAM. Investment decisions for each Fund and for GSAM's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security 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
31
<PAGE>
allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security in a particular transaction as far as a
Fund is concerned. Each Fund believes that over time its ability to
participate in volume transactions will produce better executions for the
Funds.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: [insert names]
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund and
Treasury Obligations Fund) is determined by the Funds' custodian as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New
York time) (in the case of the Government Fund and Treasury Obligations Fund,
net asset value is determined at 5:00 p.m. New York time) on each Business Day.
A Business Day means any day on which the New York Stock Exchange is open,
except for days on which banks in Chicago, Boston or New York are closed on
local holidays. Such holidays include: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $1.00 per
share, which the Trustees has determined to be in the best interests of each
Fund and its shareholders. 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 certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a
Fund would receive if it sold the instrument. During such periods, the yield
to an investor in a Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of the Funds may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Fund on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.
32
<PAGE>
The Trustees has established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio by the Trustees, at such intervals as it deems appropriate, to
determine whether such Fund's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per share based on amortized cost, as well as
review of the methods used to calculate the deviation. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any,
will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it will take such corrective action as
it regards to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00 the Trustees has the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends. Each Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no return is earned, would tend to
lower the yield on such Fund's shares.
In order to continue to use the amortized cost method of valuation each Fund's
investments, including repurchase agreements, must be U.S. dollar-denominated
instruments which the Trustees determines present minimal credit risks and
which are at the time of acquisition rated by the requisite number of NRSROs in
one of the two highest short-term rating categories or, in the case of any
instrument that is not so rated, of comparable quality as determined by GSAM.
Also, each Fund must maintain a dollar-weighted average portfolio maturity (not
more than ninety (90) days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share and may not purchase any instrument
with a remaining maturity of more than thirteen (13) months. However, a Fund
may also, consistent with the provisions of the above-mentioned rule, invest in
securities with a stated maturity of more than thirteen (13) months, if (i) the
security is a floating or variable rate security with certain demand and
interest rate reset features and (ii) the security, except in the case of
Tax-Free Fund and Municipal Fund, is a First Tier Security.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of credi-
33
<PAGE>
tors, will be specifically allocated to such Fund and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses are
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made. In addition,
within each Fund, FST Shares, FST Administration Shares, FST Service Shares and
FST Preferred Shares (if any) will be subject to different expense structures
(see "Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed for regular trading other than customary weekend and holiday closings
or during which trading on the New York Stock Exchange is restricted, (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable, (iii) as the SEC may by order permit for
the protection of the shareholders of the Trust or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Fund's shares.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from a Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the net asset value of the shares being redeemed. If a shareholder
receives a distribution in kind, he or she should expect to incur transaction
costs when he or she converts the securities to cash.
A FST shareholder of any Fund with balances in excess of $100 million may elect
to have a special account with State Street for the purpose of redeeming shares
from its account in that Fund by check. When State Street receives a completed
signature card and authorization form, the shareholder will be provided with 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 fractional shares will be redeemed to cover the amount of the check.
Cancelled checks will be returned to the shareholder by State Street. The Trust
and Goldman Sachs each reserves the right to waive the minimum requirement.
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<PAGE>
The check redemption privilege enables a shareholder to receive the dividends
declared on the shares 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 an account. If the amount of a check is
greater than the value of shares held in the shareholder's account, the check
will be returned unpaid, and the shareholder may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the
availability of or terminate the check redemption privilege at any time with
respect to a particular shareholder or Service Organization in general. The
Trust and State Street reserve the right at any time to suspend the check
redemption privilege 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 the Funds.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated in accordance with a standard
method prescribed by the rules of the SEC. Under this method, the yield
quotation is based on a hypothetical account having a balance of exactly one
share at the beginning of a seven-day period.
Yield, effective yield and tax equivalent yield are calculated separately for
each class of a Fund's shares. Each class of Share is subject to different
fees and expenses and, consequently, may have differing yields for the same
period.
The yield quotation is computed as follows: the net change, exclusive of
capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest
100th of 1%. Such yield quotation shall take into account all fees that are
charged to a Fund.
Each Fund also may advertise a quotation of effective yield for a seven (7)
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding one (1) to that return, raising the sum to the 365/7 power and
subtracting one from the result, according to the following formula:
Effective Yield=[(base period return + 1)] - 1.
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<PAGE>
Treasury Instruments, Federal Tax-Free and Municipal Funds may also advertise a
tax-equivalent yield which is computed by dividing that portion of a Fund's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or return for
a stated period of time, the return for a Fund will fluctuate from time to time
and does not provide a basis for determining future returns. Return is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to a Fund. The return of each Fund may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Fund, with
respect to FST Shares, FST Administration Shares, FST Service Shares and FST
Preferred Shares for the seven-day period ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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."
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<PAGE>
In the absence of such fee reductions, the yield, effective yield and the
tax-equivalent yield of each Fund for the same period would have been as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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%.
From time to time any Fund may publish an indication of its past performance as
measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes,
Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall Street
Journal.
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 potential benefits to be derived from
asset allocation strategies and the Goldman Sachs mutual funds that may form
part of such an asset allocation strategy. Such advertisements and information
may also include a discussion of GSAM's current economic outlook
37
<PAGE>
and domestic and international market views and recommend periodic tactical
modifications to current asset allocation strategies. Such advertisements and
information may also highlight or summarize the services that GSAM and/or its
affiliates provide in support of an asset allocation program.
TAX INFORMATION
Each Fund has qualified and has elected or intends to qualify and elect to be
treated as a separate regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
does not involve supervision of management or investment practices or policies
by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must, among
other things, (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock, securities or certain other
investments held less than three months; and (c) diversify its holdings so
that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total (gross) assets is represented by cash and cash
items (including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities limited, in respect of any
one issuer, to an amount not greater in value than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of the market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Fund, as a regulated investment company, will not be subject to federal
income tax on any of its net investment income and net realized capital gains
that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Fund
distributes at least 90% of its investment company taxable income (generally
all of its net taxable income other than "net capital gain," which is the
excess of net long-term capital gain over net short-term capital loss) for such
year, and in the case of any Fund that earns tax-exempt interest, at least 90%
of the excess of the tax-exempt interest
38
<PAGE>
it earns over certain disallowed deductions. A Fund will be subject to federal
income tax at regular corporate rates on any investment company taxable income
or net capital gain that it does not distribute for a taxable year. In order
to avoid a nondeductible 4% federal excise tax, a Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98%
of its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous
year that were not distributed in such year and on which the Fund paid no
federal income tax.
Dividends paid by a Fund from taxable net investment income (including income
attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of
net short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of shareholders. Such distributions will not
qualify for the corporate dividends-received deduction. Distributions paid by
a Fund from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of a Fund have been held by such shareholders,
and also will not qualify for the corporate dividends-received deduction. A
Fund's net realized capital gains for a taxable year are computed by taking
into account any capital loss carryforward of that Fund.
Distributions paid by Tax-Free Fund or Municipal Fund from tax-exempt interest
received by it and properly designated as "exempt-interest dividends" will
generally be exempt from regular federal income tax, provided that at least 50%
of the value of the applicable Fund's total assets at the close of each quarter
of its taxable year consists of tax-exempt obligations, i.e., obligations
described in Section 103(a) of the Code (not including shares of other
regulated investment companies that may pay exempt-interest dividends, because
such shares are not treated as tax-exempt obligations for this purpose).
Distributions paid by the other Funds from any tax-exempt interest they may
receive will not be tax-exempt, because they will not satisfy the 50%
requirement described in the preceding sentence. A portion of any tax-exempt
distributions attributable to interest on certain "private activity bonds", if
any, received by a Fund may constitute tax preference items and may give rise
to, or increase liability under, the alternative minimum tax for particular
shareholders. In addition tax-exempt distributions of a Fund may be considered
in computing the "adjusted current earnings" preference item of its corporate
shareholders in determining the corporate alternative minimum tax and the
corporate environmental tax. To the extent that a Fund invests in certain
short-term instruments, including repurchase agreements, the interest on which
is not exempt from federal income tax, any distributions of
39
<PAGE>
income from such investments will be taxable to shareholders as ordinary
income. All or substantially all of any interest on indebtedness incurred
directly or indirectly to purchase or carry shares of Tax-Free Fund or
Municipal Fund will generally not be deductible. The availability of
tax-exempt obligations and the value of these Funds may be affected by
restrictive tax legislation enacted in recent years.
In purchasing municipal obligations, Tax-Free Fund and Municipal Fund each
relies on opinions of nationally-recognized bond counsel for each issue as to
the excludability of interest on such obligations from gross income for federal
income tax purposes. Each Fund does not undertake independent investigations
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis in each share so received equal to the amount of cash
they would have received had they elected to receive cash.
Money Market Fund and/or Plus Fund may be subject to foreign withholding or
other foreign taxes with respect to its investments in certain securities of
foreign entities. These taxes may be reduced under the terms of applicable
U.S. income tax treaties in some cases, and the applicable Fund intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although neither Fund anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by either Fund,
that Fund could make an election under Code Section 853 to permit its
shareholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by the Fund in foreign
countries. In the event such an election is made, shareholders will be
required to include their pro rata share of such taxes in gross income and will
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the Code. Shareholders who are
precluded from taking such credits or deductions will nevertheless be taxed on
their pro rata share of the foreign taxes included in their gross income,
unless they are otherwise exempt from federal income tax.
Each Fund will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the Fund with
their taxpayer identification number or with certain certifications required by
the Internal Revenue Service or if the Internal
40
<PAGE>
Revenue Service or a broker notifies a Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Tax-Free Fund or Municipal Fund will
not be subject to backup withholding if the Fund reasonably estimates that at
least 95% of its distributions will be exempt interest dividends. Each Fund
may refuse to accept an application that does not contain any required taxpayer
identification number or certification that the number provided is correct or
that the investor is an exempt recipient. If the withholding provisions are
applicable, any such distributions, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisors about the applicability of the backup
withholding provisions.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder on the shareholder's
federal income tax return. The Funds will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Free Fund and the Municipal Fund, the amounts
that qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum tax.
Shareholders who received exempt-interest dividends and have not held their
shares of the applicable Fund for its entire taxable year may have designated
as tax-exempt or as a tax preference item a percentage of their distributions
which is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Fund. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in the Fund in the
shareholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Assuming that each Fund qualifies as a regulated investment company for federal
income tax purposes, each Fund, as a series of a Massachusetts business trust,
will not be subject to any income, franchise or corporate excise tax in
Massachusetts.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each shareholder who is not a U.S.
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<PAGE>
person should consult his or her tax adviser regarding the U.S. and non-U.S.
tax consequences of ownership of shares of a Fund, including the possibility
that such a shareholder may be subject to a U.S. nonresident alien withholding
tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax
treaty) on certain distributions from a Fund or to backup withholding on
certain payments if a current IRS Form W-8 or acceptable substitute is not on
file with the Funds.
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Funds may have tax consequences for
shareholders different from those of a direct investment in the Funds'
securities. Shareholders should consult their own tax advisers concerning
these matters. For example, in such states or localities it may be appropriate
for shareholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Funds in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or exempt from intangibles tax the value of the shares of such companies
attributable to such obligations, subject to certain state-specific
requirements and/or limitations.
This discussion of the tax treatment of the Funds and their shareholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information, which are subject to change either prospectively or retroactively.
ORGANIZATION AND CAPITALIZATION
Goldman Sachs Money Market Trust was established as a Massachusetts business
trust by a Declaration of Trust dated December 6, 1978, and reorganized, as
part of Goldman Sachs Trust, as a Delaware business trust, by a Declaration of
Trust dated January 28, 1997. Each of the Funds became a series of the Trust
pursuant to a reorganization which occurred on April 30, 1997.
Each shareholder is deemed to have expressly assented and agreed to the terms
of the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of shares of beneficial
interest. The Board of Trustees has authority under the Declaration of Trust
to create and classify shares of beneficial interest in separate series without
further action by shareholders. The Declaration of Trust further authorizes
the Board of Trustees to classify or reclassify any series or portfolio of
shares into one or more
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classes. The Board of Trustees has authorized the issuance of up to four
classes of shares of each of the Funds: FST Shares, FST Service Shares, FST
Administration Shares and FST Preferred Shares.
Each FST Share, FST Administration Share, FST Service Share and FST Preferred
Share of a Fund represents an equal proportionate interest in the assets
belonging to such Fund. It is contemplated that most shares will be held in
the accounts of which the record owner is a bank or other institution acting,
directly or through an agent, as nominee for its customers who are the
beneficial owners of the shares or another organization designated by such bank
or institution. FST Shares may be purchased for accounts held in the name of
an investor or institution that is not compensated by the Fund for services
provided to the institution's investors. FST Administration Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including maintenance of
account records and processing orders to purchase, redeem and exchange FST
Administration Shares. FST Administration Shares of a Fund bear the cost of
administration fees at the annual rate of up to .25 of 1% of the average daily
net assets of such Shares. FST Preferred Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including acting directly or through an agent, as
the sole shareholder of record, maintain account records of its customers and
processing orders to purchase, redeem and exchange FST Preferred Shares. FST
Preferred Shares of a Fund bear the cost of preferred administration fees at an
annual rate of up to 0.10% of the average daily net assets of such shares. FST
Service Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and shareholder liaison services
to its customers, including maintenance of account records, processing orders
to purchase, redeem and exchange FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. FST Service
Shares of a Fund bear the cost of service fees at the annual rate of up to .50
of 1% of the average daily net assets of such Shares.
It is possible that an institution or its affiliates may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares of a Fund. In the event a Fund is
distributed by sales persons or any other persons, they may receive different
compensation with respect to different classes of shares of a Fund. FST
Administration Shares, FST Preferred Shares and FST Service Shares each have
certain exclusive voting rights on matters relating to their respective plans.
Shares of each class may be exchanged only for shares of the same class in
another Fund. Except as described above, the four classes of shares are
identical. Certain aspects of the shares may be altered, after advance
43
<PAGE>
notice to shareholders, if it is deemed necessary in order to satisfy certain
tax regulatory requirements.
Each FST Share, FST Service Share, FST Administration Share and FST Preferred
Share of a Fund is entitled to one vote per share; however, separate votes will
be taken by the Fund or class (or by more than one fund of the Trust or class
voting as a single class if similarly affected) on matters affecting only the
Fund or class (or those affected Funds or classes) or as otherwise required by
law. Shares are freely transferable and have no preemptive, subscription or
conversion rights. All shares issued and outstanding are fully paid and
non-assessable. The Declaration of Trust provides for shareholder voting only
for the election or removal of one or more Trustees, if a meeting is called for
that purpose, and for certain other designated matters. The Trust does not
generally hold annual or other meetings of shareholders. The shares of the
Trust have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so, and, in such event, the holders of the
remaining less than 50% of the shares voting for the election of Trustees will
not be able to elect any person or persons to the Board of Trustees. Each
Trustee serves until the next meeting of shareholders, if any, called for the
purpose of electing or reelecting such Trustee or successor to such Trustee,
and until the election and qualification of such successor, if any, or until
such Trustee sooner dies, resigns, retires or is removed by the shareholders or
two-thirds of the Trustees.
As of April ____, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Prime Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Money Market Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Treasury Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Government Fund: [update].
As of April __, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Tax-Free Fund: [update].
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
The Trust is an entity of the type commonly known as a "Delaware business
trust", which is the form in which many mutual funds are organized.
Under Delaware law, the shareholders of the Delaware Trust are not
generally subject to liability for the debts or obligations of the Delaware
Trust. Similarly, Delaware law provides that a Fund will not be liable for the
debts or obligations of any other series of the Delaware Trust. However, no
similar statutory or other authority limiting business trust shareholder
liability
44
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exists in many 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 of the Delaware Trust contains 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 Fund or the Trustees. The Declaration
of Trust of the Delaware Trust provides for indemnification by the relevant
Fund for any loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of Trust of the Delaware Trust also provides that a Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy and judgment
thereon. In view of the above, the risk of personal liability of shareholders
is remote.
On any matter submitted to a vote of the Shareholders of the Trust, all Shares
shall be voted in the aggregate not by individual Fund or Class, except (a)
when required by the 1940 Act, Shares shall be voted by individual Fund or
Class, and (b) when the Trustees have determined that the matter affects the
interests of only one or more Fund or Class, then only the Shareholders of all
such Fund or Classes shall be entitled to vote. As determined by the Trustees
without the vote or consent of Shareholders, on any matter submitted to a vote
of Shareholders, either (i) each whole Share shall be entitled to one vote as
to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote or (ii) each dollar of Net Asset
Value (number of Shares owned times Net Asset Value per share of such Fund or
Class, as applicable) shall be entitled to one vote on any matter on which such
Shares are entitled to vote and each fractional dollar amount shall be entitled
to a proportionate fractional vote. There is no cumulative voting in the
election of Trustees.
In connection with the establishment of one or more Funds or Classes, the
Trustees establishing such Funds or Class may appoint, to the extent permitted
by the Delaware Business Trust Act, separate Trustees with respect to such
Funds or Classes (the "Series Trustees"). Series Trustees may, but are not
required to, serve as Trustees of the Trust or any other Fund or Class of the
Trust. To the extent provided by the Trustee in the appointment of Series
Trustees, the Series Trustees may have, to the exclusion of any other Trustees
of the Trust, all the powers and authorities of Trustees with respect to such
Fund or Class, but may have no power or authority with respect to any other
Fund or Class. Shareholders for a Fund or Class with respect to which Series
Trustees have been appointed shall only be entitled to vote in the election of
such Series Trustees.
Upon the vote of a majority of the Shares Outstanding and entitled to vote of
the Trust or of each Fund to be affected, the
45
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Trustees may (i) sell and convey all or substantially all of the assets of all
Funds or any affected Fund or to another entity which is an open-end investment
company as defined in the 1940 Act, or is a Fund thereof, for adequate
consideration, which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any
affected Fund, and which may include shares of or interests in such Fund,
entity, or Fund thereof; or (ii) at any time sell and convert into money all or
substantially all of the assets of all Funds or any affected Fund. The
Trustees may take any of the actions specified above without obtaining the vote
of a majority of the outstanding Shares of the Trust or any Fund if a majority
of the Trustees determines, in their sole discretion, that the continuation of
the Trust or Fund is not in the best interests of the Trust, such Fund, or
their respective Shareholders. Also, the Trustees may, without shareholder
approval unless such approval is required by applicable federal law, (i) cause
the Trust to merge or consolidate with or into one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a Fund thereof, (ii) cause the Shares
to be exchanged under or pursuant to any state or federal statute to the extent
permitted by law, or (iii) cause the Trust to incorporate under the laws of
Delaware or any other U.S. jurisdiction. The Trustees may, without Shareholder
approval, invest all or a portion of the assets of any Fund, or dispose of all
or a portion of the assets of any Fund, and invest the proceeds of such
disposition in interests issued by one or more other investment companies
registered under the Investment Company Act. The Trustees may, without
Shareholder approval unless such approval is required by applicable law, cause
a Fund that is organized in the master/feeder fund structure to withdraw or
redeem into assets from the master fund and cause such Fund to invest its
assets directly in securities and other financial instruments or in another
master fund.
In addition to the requirements set forth in Section 3816 of the Delaware
Business Trust Act, the Declaration of Trust provides that a Shareholder may
bring a derivative action on behalf of the Trust only if the following
conditions are met:
(a) Shareholders eligible to bring such derivative action under the
Delaware Business Trust Act who hold at least 10% of the Outstanding Shares of
the Trust, or 10% of the Outstanding Shares of the Fund or Class to which such
action relates, shall join in the request of the Trustees to commence such
action; and
(b) the Trustees may be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such claim.
The Trustees shall be entitled to retain counsel or other advisors in
considering the merits of the request and shall require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
46
<PAGE>
such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust of the Delaware 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.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act
as custodian of the Funds' assets and, in that capacity, maintains the
accounting records and calculates the daily net asset value per share of each
Fund. Its mailing address is P.O. Box 1713, Boston, MA 02105. State Street
has appointed The Northern Trust Company, 50 South LaSalle Street, Chicago,
Illinois 60675 as subcustodian to hold cash and certain securities purchased by
the Funds.
INDEPENDENT ACCOUNTANTS
________________, independent public accounts, One International Place, 100
Oliver Street, Boston, Massachusetts 02110, have been selected as auditors of
the Trust. In addition to audit services, __________________ prepares each
Fund's federal and state tax returns, and provides consultation and assistance
on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Funds then in existence and conducting
investment operations, including the Statements of Investments as of December
31, 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 December 31, 1996 Annual Report
to the shareholders, are attached hereto and incorporated by reference into
this Statement of Additional Information.
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SERVICE PLAN
The Trust, on behalf of each Fund, has adopted a service plan (the "Plan") with
respect to the FST Service Shares which authorizes the Funds to compensate
Service Organizations for providing certain account administration and personal
and account maintenance services to their customers who are beneficial owners
of such shares. Pursuant to the Plan, the Trust, on behalf of each Fund,
enters into agreements with Service Organizations which purchase FST Service
Shares on behalf of their customers ("Service Agreements"). Under such
Service Agreements the Service Organizations may: (a) act, directly or through
an agent, as the sole shareholder of record and nominee for all customers, (b)
maintain account records for each customer who beneficially owns FST Service
Shares, (c) answer questions and handle correspondence from customers regarding
their accounts, (d) process customer orders to purchase, redeem and exchange
FST Service Shares, and handle the transmission of funds representing the
customers' purchase price or redemption proceeds, (e) issue confirmations for
transactions in shares by customers, (f) provide facilities to answer questions
from prospective and existing investors about FST Service Shares, (g) receive
and answer investor correspondence, including requests for prospectuses and
statements of additional information, (h) display and make prospectuses
available on the Service Organization's premises, (i) assist customers in
completing application forms, selecting dividend and other account options and
opening custody accounts with the Service Organization and (j) act as liaison
between customers and the Funds, including obtaining information from the
Funds, working with the Funds to correct errors and resolve problems and
providing statistical and other information to the Funds. As compensation for
such services, the Trust, on behalf of each Fund, pays each Service
Organization a service fee in an amount up to .50% (on an annualized basis) of
the average daily net assets of the FST Service Shares of each Fund
attributable to or held in the name of such Service Organization for its
customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets.
For the fiscal year ended December 31, 1996, December 31, 1995 and
the eleven months ended December 31, 1994, with respect to each Fund, the
amount of service fees paid by each Fund to Service Organizations was as
follows:
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Dec. 1996 Dec. 1995 Dec. 1994
--------- --------- ---------
Prime Obligations Fund(1)(6) $299,892 $115,595
Money Market Fund(2) 8,447 -
Treasury Obligations Fund(3)(6) 584,861 168,982
Government Fund(4)(6) 39,940 -
Tax-Free Fund(5) 70,179 1,199
_______________
(1) FST Service Share activity commenced January 8, 1992.
(2) Has not commenced operations.
(3) FST Service Share activity commenced October 15, 1991.
(4) Has not commenced operations.
(5) FST Service Share activity commenced September 23, 1994.
(6) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
The Trust has adopted the Plan pursuant to Rule 12b-1 under the Investment
Company Act in order to avoid any possibility that payments to the Service
Organizations pursuant to the Service Agreements might violate the Investment
Company Act. Rule 12b-1, which was adopted by the SEC under the Investment
Company Act, regulates the circumstances under which an investment company or
series thereof may bear expenses associated with the distribution of its
shares. In particular, such an investment company or series thereof cannot
engage directly or indirectly in financing any activity which is primarily
intended to result in the sale of shares issued by the company unless it has
adopted a plan pursuant to, and complies with the other requirements of, such
Rule. The Trust believes that fees paid for the services provided in the Plan
and described above are not expenses incurred primarily for effecting the
distribution of FST Service Shares. However, should such payments be deemed by
a court or the SEC to be distribution expenses, such payments would be duly
authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distributing securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, state securities laws on this issue may differ
from the interpretations of federal law expressed herein and banks and other
financial institutions purchasing FST Service Shares on behalf of their
customers may be required to register as dealers pursuant to state law. Should
future legislative or administrative action or judicial or administrative
decisions or interpretations prohibit or restrict the activities of one or more
of the Service Organizations in connection with the Funds, such Service
Organizations might be required to alter materially or discontinue the services
performed under their Service Agreements. If one or more of the Service
Organizations were restricted from effecting purchases or sales of FST Service
Shares automatically pursuant to pre-authorized instructions, for
49
<PAGE>
example, effecting such transactions on a manual basis might affect the size
and/or growth of a Fund. Any such alteration or discontinuance of services
could require the Board of Trustees to consider changing the Funds' method of
operations or providing alternative means of offering FST Service Shares to
customers of such Service Organizations, in which case the operation of a Fund,
its size and/or its growth might be significantly altered. It is not
anticipated, however, that any alteration of the Funds' operations would have
any effect on the net asset value per share or result in financial losses to
any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in FST Service Shares. Service Organizations, including banks regulated
by the Comptroller of the Currency, the Federal Reserve Board or the Federal
Deposit Insurance Corporation, and investment advisers and other money managers
subject to the jurisdiction of the SEC, the Department of Labor or state
securities commissions, are urged to consult legal advisers before investing
fiduciary assets in FST Service Shares.
The Trustees, including a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operation of such Plan or the related Service Agreements, most recently
voted to approve the Plan and Service Agreements for each Fund at a meeting
called for the purpose of voting on such Plan and Service Agreements on
April 23, 1997. The Plan and Service Agreements 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.
The Plan may not be amended to increase materially the amount to be spent for
the services described therein without approval of the FST Service Shareholders
of each Fund, and all material amend ments of the Plan must also be approved by
the Board of Trustees in the manner described above. The Plan may be
terminated at any time by a majority of the Board of Trustees as described
above or by vote of a majority of the outstanding FST Service Shares of each
Fund. The Service Agreements may be terminated at any time, without payment of
any penalty, by vote of a majority of the Board of Trustees as described above
or by a vote of a majority of the outstanding FST Service Shares of each Fund
on not more than sixty (60) days' written notice to any other party to the
Service Agreements. The Service Agreements shall terminate automatically if
assigned. As long as the Plan is in effect, the selection and nomination of
those Trustees who are not interested persons shall be committed to the
discretion of the Trust's Nominating Committee, which consists of all of the
non-interested members of the Board of Trustees. The Board of Trustees has
50
<PAGE>
determined that, in its judgment, there is a reasonable likelihood that the
Plan will benefit each Fund and holders of FST Service Shares of such Fund. In
the Board of Trustees' quarterly review of the Plan and Service Agreements, the
Board will consider their continued appropriateness and the level of
compensation provided therein.
51
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS FINANCIAL SQUARE FUNDS
4900 Sears Tower, Chicago, Illinois 60606
- ----------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION - MAY 1, 1997.
FST PREFERRED SHARES
- ----------------------------------------------------------------
Goldman Sachs Trust (the "Trust") is a no-load, open-end, management
investment company (or mutual fund) which includes the Financial Square Funds.
This Statement of Additional Information relates solely to the offering of FST
Preferred Shares of Financial Square Prime Obligations Fund (Prime Obligations
Fund), Financial Square Money Market Fund (Money Market Fund), Financial Square
Treasury Obligations Fund (Treasury Obligations Fund), Financial Square Treasury
Instruments Fund ("Treasury Instruments Fund") Financial Square Government Fund
(Government Fund), Financial Square Federal Fund ("Federal Fund"), Financial
Square Tax Free Money Market Fund (Tax Free Fund), Financial Square Money Market
Plus Fund ("Plus Fund") and Financial Square Municipal Money Market Fund
(Municipal Fund) (individually, a "Fund" and collectively the "Funds").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Funds' investment adviser . Goldman Sachs serves as the Funds' distributor and
transfer agent.
The Goldman Sachs Mutual Funds Group ("MFG") offers banks, corporate cash
managers, investment advisers and other institutional investors a family of
professionally-managed mutual funds, including money market, fixed income and
equity funds, and a range of related services. MFG is part of GSAM. All
products are designed to provide clients with the benefit of the expertise of
GSAM and its affiliates in security selection, asset allocation, portfolio
construction and day-to-day management.
The hallmark of MFG is personalized service, which reflects the priority
that Goldman Sachs places on serving clients' interests. As Goldman Sachs
clients, shareholders will be assigned an Account Administrator ("AA"), who is
ready to help shareholders with questions concerning their accounts. During
business hours, service organizations can call their AA through a toll-free
number to place purchase or redemption orders or obtain Fund and account
information. The AA can also answer inquiries about rates of return and
portfolio composition and holdings, and guide service organizations through
operational details. A Goldman Sachs client can also utilize the SMART(SM)
personal computer software system which allows shareholders to purchase or
redeem shares and also obtain Fund and account information directly.
<PAGE>
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus relating to FST Preferred
Shares dated May 1, 1997, a copy of which may be obtained without charge from
Service Organizations, as defined herein, or by calling Goldman Sachs at 800-
621-2550 or by writing Goldman Sachs, 4900 Sears Tower, Chicago, Illinois 60606.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices of the
Funds................................ 4
Investment Limitations.................... 17
Trustees and Officers..................... 21
The Adviser, Distributor
and Transfer Agent................... 27
Portfolio Transactions.................... 30
Net Asset Value........................... 32
Redemptions............................... 34
Calculation of Yield Quotations........... 35
Tax Information........................... 38
Organization and Capitalization........... 42
Custodian and Subcustodian................ 47
Independent Accountants................... 47
Financial Statements...................... 47
Preferred Administration Plan............. 48
Appendix A (Description of Securities
Ratings)............................. A-1
</TABLE>
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INVESTMENT POLICIES AND PRACTICES OF THE FUNDS
The following discussion elaborates on the description of each Fund's
investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
- --------------------------
Each Fund may invest in separately traded principal and interest components of
securities issued or guaranteed by the U.S. Treasury. The principal and
interest components of selected securities are traded independently under the
Separate Trading of Registered Interest and Principal of Securities program
("STRIPS"). Under the STRIPS program, the principal and interest components
are individually numbered and separately issued by the U.S. Treasury at the
request of depository financial institutions, which then trade the component
parts independently.
CUSTODIAL RECEIPTS
- ------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may also acquire custodial receipts that evidence ownership
of future interest payments, principal payments or both on certain U.S.
Government notes or bonds. Such notes and bonds are held in custody by a bank
on behalf of the owners. These custodial receipts are known by various names,
including "Treasury Receipts," "Treasury Investors Growth Receipts" ("TIGR's"),
and "Certificates of Accrual on Treasury Securities" ("CATS"). Although
custodial receipts are not considered U.S. Government securities for certain
securities law purposes, they are indirectly issued or guaranteed as to
principal and interest by the U.S. Government, its agencies, authorities or
instrumentalities.
BANK AND CORPORATE OBLIGATIONS
- ------------------------------
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
and Federal Funds) may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. The commercial paper
purchased by the Funds consists of direct U.S. dollar denominated obligations
of domestic, or in the case of the Money Market and Plus Funds, foreign
issuers. Bank obligations in which the Funds may invest include certificates
of deposit, bankers' acceptances, fixed time deposits and bank notes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return.
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect,
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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.
Prime Obligations Fund, Plus Fund and Money Market Fund may invest in
short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements
will also guarantee the return of principal and may guarantee a stream of
payments over time. A funding agreement has a fixed maturity date and may have
either a fixed rate or variable interest rate that is based on an index and
guaranteed for a set time period. Because there is no secondary market for
these investments, any such funding agreement purchased by a Fund will be
regarded as illiquid.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund (other than Treasury Instruments Fund) may only enter into repurchase
agreements with primary dealers in U.S. Government Securities. A repurchase
agreement is an arrangement under which the purchaser (i.e., the Fund)
purchases a U.S. Government security or other high quality short-term debt
obligation (the "Obligation") and the seller agrees, at the time of sale, to
repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Funds' custodian or
subcustodian. The repurchase price may be higher than the purchase price, the
difference being income to the Fund, or the purchase and repurchase prices may
be the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
Repurchase agreements pose certain risks for all entities, including the Funds,
that utilize them. Such risks are not unique to the Funds but are inherent in
repurchase agreements. The Funds seek to minimize such risks by, among others,
the means indicated below, but because of the inherent legal uncertainties
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<PAGE>
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 federal income tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the Obligation.
It is not clear whether for other purposes a court would consider the
Obligation purchased by a Fund subject to a repurchase agreement as being owned
by a Fund or as being collateral for a loan by the Fund to the seller.
If, in the event of bankruptcy or insolvency proceedings against the seller of
the Obligation, a court holds that a Fund does not have a perfected security
interest in the Obligation, a Fund may be required to return the Obligation to
the seller's estate and be treated as an unsecured creditor of the seller. As
an unsecured creditor, a Fund would be at risk of losing some or all of the
principal and income involved in the transaction. To minimize this risk, the
Funds utilize custodians and subcustodians that the Adviser believes follow
customary securities industry practice with respect to repurchase agreements,
and the Adviser analyzes the creditworthiness of the obligor, in this case the
seller of the Obligation. But because of the legal uncertainties, this risk,
like others associated with repurchase agreements, cannot be eliminated.
Also, in the event of commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, a Fund may encounter delay and incur costs before
being able to sell the security. Such a delay may involve loss of interest or
a decline in the price of the Obligation.
Apart from risks associated with bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the Obligation subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), the Fund will
direct the seller of the Obligation to deliver additional securities so that
the market value of all securities subject to the repurchase agreement equals
or exceeds the repurchase price.
Certain repurchase agreements which mature in more than seven days can be
liquidated before the nominal fixed term on seven days or less notice. Such
repurchase agreements will be regarded as liquid instruments.
In addition, the Funds, (other than the Treasury Instruments Fund) together
with other registered investment companies having management agreements with
the Adviser or any of its affiliates, may transfer uninvested cash balances
into a single joint account, the daily aggregate balance of which will be
invested in one or more repurchase agreements.
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FOREIGN SECURITIES
- ------------------
Money Market Fund and Plus Fund may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. Tax-Free Fund
and Municipal Fund may also invest in municipal instruments backed by letters
of credit issued by certain of such banks. Under current Securities and
Exchange Commission ("SEC") rules relating to the use of the amortized cost
method of portfolio securities valuation, Money Market Fund and Plus Fund are
restricted to purchasing U.S. dollar denominated securities, but they are not
otherwise precluded from purchasing securities of foreign issuers.
Investments in foreign securities and bank obligations may involve
considerations different from investments in domestic securities due to limited
publicly available information; non-uniform accounting standards; the possible
imposition of withholding or confiscatory taxes; the possible adoption of
foreign governmental restrictions affecting the payment of principal and
interest; expropriation; or other adverse political or economic developments.
In addition, it may be more difficult to obtain and enforce a judgment against
a foreign issuer or a foreign branch of a domestic bank.
ASSET-BACKED AND RECEIVABLES-BACKED SECURITIES
- ----------------------------------------------
Each of Prime Obligations Fund, Money Market Fund and Plus Fund may invest in
asset-backed and receivables-backed securities. Asset-backed and
receivables-backed securities represent participations in, or are secured by
and payable from, pools of assets such as motor vehicle installment sale
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (credit card) agreements,
corporate securities and other categories of receivables. Such asset pools are
securitized through the use of privately-formed trusts or special purpose
vehicles. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution, or other
credit enhancements may be present. The value of a Fund's investments in
asset-backed and receivables-backed securities may be adversely affected by
prepayment of the underlying obligations. In addition, the risk of prepayment
may cause the value of these investments to be more volatile than a Fund's
other investments.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases, trade receivables and
credit card receivables, are being securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective
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investment objective and policies, the Funds may invest in these and other
types of asset-backed securities that may be developed in the future. This
Statement of Additional Information will be amended or supplemented as
necessary to reflect the Prime Obligations, Money Market and Plus Funds'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, the Funds will generally not invest in an asset-backed security if the
income received with respect to such investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these
securities is of shorter maturity than mortgage loans and is less likely to
experience substantial prepayments in response to interest rate fluctuations.
As set forth above, several types of asset-backed and receivables-backed
securities have already been offered to investors, including, for example,
Certificates for Automobile Receivablessm ("CARS(SM)") and interests in pools of
credit card receivables. CARS(SM) represent undivided fractional interests in a
trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS(SM) are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS(SM) may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. There is the possibility that
recoveries on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets
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to make payments, the securities may contain elements of credit support which
fall into two categories: (i) liquidity protection and (ii) protection against
losses resulting from ultimate default by an obligor or servicer. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of payments on the
losses results from payment of the insurance obligations on at least a portion
of the assets in the pool. This protection may be provided through guarantees,
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transactions or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information reflecting the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could adversely
affect the value of or return on an investment in such a security.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments could require
Prime Obligations, Money Market or Plus Fund to dispose of any of their
respective existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by the Fund to purchase or sell securities at a future date. The
price of the underlying securities (usually expressed in terms of yield) and
the date when the securities will be delivered and paid for (the settlement
date) are fixed at the time the transaction is negotiated. When-issued
purchases and forward commitment transactions are negotiated directly with the
other party, and such commitments are not traded on exchanges, but may be
traded over-the-counter.
A Fund will purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis only with the intention of completing
the transaction and actually purchasing or selling the securities. If deemed
advisable as a matter of investment strategy, however, a Fund may dispose of or
renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered
to the Fund on the settlement date. The Fund may realize a capital gain or
loss in connection with these transactions distributions from which would be
taxable to its shareholders. For purposes of determining the Fund's average
dollar weighted maturity, the maturity of when-issued or forward commitment
securities will be calculated from the commitment date.
When a Fund purchases securities on a when-issued or forward commitment basis,
the Fund's custodian or subcustodian will maintain in a segregated account cash
or liquid assets, as
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applicable by law having a value (determined daily) at least equal to the
amount of the Fund's purchase commitments. In the case of a forward commitment
to sell portfolio securities subject to such commitment, the custodian or
subcustodian will hold the portfolio securities in a segregated account while
the commitment is outstanding. These procedures are designed to ensure that
the Fund will maintain sufficient assets at all times to cover its obligations
under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
- -----------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable amount master demand notes. These obligations permit the
investment of fluctuating amounts at varying rates of interest pursuant to
direct arrangements between a Fund, as lender, and the borrower. Variable
amount master demand notes are direct lending arrangements between the lender
and borrower and are not generally transferable nor are they ordinarily rated.
A Fund may invest in them only if the Adviser believes that the notes are of
comparable quality to the other obligations in which the Fund may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
- --------------------------------------------------
Each Fund (other than Treasury Obligations and Treasury Instruments Funds) may
purchase variable and floating rate demand instruments that are tax exempt
municipal obligations or other debt securities that possess a floating or
variable interest rate adjustment formula. These instruments permit a Fund to
demand payment of the principal balance plus unpaid accrued interest upon a
specified number of days' notice to the issuer or its agent. The demand
feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument.
The terms of the variable or floating rate demand instruments that a Fund may
purchase provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon current market
levels, the prime rate of a bank or other appropriate interest rate adjustment
index as provided in the respective instruments. Some of these instruments are
payable on demand on a daily basis or on not more than seven days' notice.
Others, such as instruments with quarterly or semiannual interest rate
adjustments, may be put back to the issuer on designated days on not more than
thirty days' notice. Still others are automatically called by the issuer
unless a Fund instructs otherwise. The Trust, on behalf of a Fund, intends to
exercise the demand only (1) upon a default under the terms of the debt
security, (2) as needed to provide liquidity to a Fund, (3) to maintain the
respective quality standards of a Fund's investment portfolio, or (4) to attain
a more optimal portfolio structure. A Fund will determine the variable or
floating rate demand instruments that it will purchase in accordance with
procedures approved by the Trustees to minimize credit risks. To be eligible
for purchase of a Fund, a variable or floating rate
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demand instrument which is unrated must have quality characteristics similar to
those of other obligations in which the Fund may invest. The Adviser may
determine that an unrated variable or floating rate demand instrument meets a
Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria for a Fund. Thus,
either the credit of the issuer of the obligation or the guarantor bank or both
will meet the quality standards of the Fund.
The maturity of the variable or floating rate demand instruments held by a Fund
will ordinarily be deemed to be the longer of (1) the notice period required
before the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest
rate adjustment. The acquisition of variable or floating rate demand notes for
a Fund must also meet the requirements of rules issued by the SEC applicable to
the use of the amortized cost method of securities valuation. The Funds will
also consider the liquidity of the market for variable and floating rate
instruments and in the event that such instruments are illiquid, the Funds'
investments in such instruments will be subject to the limitation on illiquid
securities.
Each Fund (other than Treasury Obligations, Government, Treasury Instruments
Fund and Federal Funds) may invest in participation interests in variable or
floating rate tax-exempt obligations held by financial institutions (usually
commercial banks). Such participation interests provide a Fund with a specific
undivided interest (up to 100%) in the underlying obligation and the right to
demand payment of its proportional interest in the unpaid principal balance
plus accrued interest from the financial institution upon a specific number of
days' notice. In addition, the participation interest generally is backed by
an irrevocable letter of credit or guarantee from the institution. The
financial institution usually is entitled to a fee for servicing the obligation
and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
- ----------------------------------------
A Fund may purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended ("1933 Act"),
including restricted securities offered and sold to "qualified institutional
buyers" under Rule 144A under the 1933 Act. However, a Fund will not invest
more than 10% of the value of its net assets in securities which are illiquid,
which includes fixed time deposits and repurchase agreements maturing in more
than seven days that cannot be traded on a secondary market and restricted
securities, unless, in the case of restricted securities, the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are liquid. The
Board of Trustees may adopt guidelines and delegate to the Adviser the daily
function of determining and monitoring liquidi-
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ty of restricted securities. The Board of Trustees, however, will retain
sufficient oversight and be ultimately responsible for the determinations. Since
it is not possible to predict with assurance that the market for securities
eligible for resale under Rule 144A will continue to be liquid, the Board of
Trustees will carefully monitor each Fund's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities.
MUNICIPAL OBLIGATIONS
- ---------------------
Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free Fund and
Municipal Fund may invest in municipal obligations. Municipal obligations are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies, authorities and
instrumentalities and the District of Columbia to obtain funds for various
public purposes. The interest on most of these obligations is generally exempt
from regular federal income tax. The two principal classifications of
municipal obligations are "notes" and "bonds."
Notes. Municipal notes are generally used to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include tax anticipation notes, revenue anticipation notes, bond anticipation
notes, tax and revenue anticipation notes, construction loan notes, tax-exempt
commercial paper and certain receipts for municipal obligations.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. They are frequently general obligations of
the issuer, secured by the taxing power for payment of principal and interest.
Revenue anticipation notes are issued in expectation of receipt of other types
of revenue such as federal or state aid. Tax anticipation notes and revenue
anticipation notes are generally issued in anticipation of various seasonal
revenues such as income, sales, use, and business taxes. Bond anticipation
notes are sold to provide interim financing in anticipation of long-term
financing in the market. In most cases, these monies provide for the repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or
agency thereof. The Funds which invest in municipal obligations may also
acquire securities in the form of custodial receipts which evidence ownership
of future interest payments, principal payments or both on certain state and
local governmental and authority obligations where, in the opinion of bond
counsel, interest payments with respect to such custodial receipts are excluded
from gross income for
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federal income tax purposes. Such obligations are held in custody by a bank on
behalf of the holders of the receipts. These custodial receipts are known by
various names, including "Municipal Receipts" ("MRs") and "Municipal
Certificates of Accrual on Tax-Exempt Securities" ("M-CATS"). There are a
number of other types of notes issued for different purposes and secured
differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital needs and
have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states, counties,
cities, towns and regional districts and are used to fund a wide range of
public projects including the construction or improvement of schools, highways
and roads, water and sewer systems and a variety of other public purposes. The
basic security of general obligation bonds is the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes
that can be levied for the payment of debt service may be limited or unlimited
as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital projects
including: electric, gas, water and sewer systems; highways, bridges and
tunnels; port and airport facilities; colleges and universities; and hospitals.
The principal security for a revenue bond is generally the net revenues derived
from a particular facility or group of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Private activity bonds (a term that includes certain types of bonds, the
proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Tax-Free Fund does not intend to invest in
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private activity bonds if the interest from such bonds would be an item of tax
preference to shareholders under the federal alternative minimum tax.
Municipal bonds with a series of maturity dates are called serial bonds. The
serial bonds which the Funds may purchase are limited to short-term serial
bonds--those with original or remaining maturities of thirteen months or less.
The Funds may purchase long-term bonds provided that they have a remaining
maturity of thirteen months or less or, in the case of bonds called for
redemption, the date on which the redemption payment must be made is within
thirteen months. The Funds may also purchase long-term bonds (sometimes
referred to as "Put Bonds"), which are subject to a Fund's commitment to put
the bond back to the issuer at par at a designated time within thirteen months
and the issuer's commitment to so purchase the bond at such price and time.
The Funds which invest in municipal obligations may invest in tender option
bonds. A tender option bond is a municipal obligation (generally held pursuant
to a custodial arrangement) having a relatively long maturity and bearing
interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for providing the option,
the financial institution receives periodic fees equal to the difference
between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the bond, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults by, or a
significant downgrading in the credit rating assigned to, the issuer of the
bond.
The tender option will be taken into consideration in determining the maturity
of tender option bonds and the average portfolio maturity of each Fund. The
liquidity of a tender option bond is a function of the credit quality of both
the bond issuer and the financial institution providing liquidity.
Consequently, tender option bonds are deemed to be liquid unless, in the
opinion of the Adviser, the credit quality of the bond issuer and the financial
institution is deemed, in light of the relevant Fund's credit quality
requirements, to be inadequate.
Although Tax-Free Fund and Municipal Fund intend to invest in tender option
bonds the interest on which will, in the opinion of counsel for the issuer and
sponsor or counsel selected by the Adviser, be excluded from gross income for
federal income tax
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<PAGE>
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Fund will not be considered the owner of such tender option bonds
and thus will not be entitled to treat such interest as exempt from such tax.
A similar risk exists for certain other investments subject to puts or similar
rights. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the proper tax treatment of tender
options and the associated fees, in relation to various regulated investment
company tax provisions is unclear. Tax-Free Fund and Municipal Fund intend to
manage their respective portfolios in a manner designed to eliminate or
minimize any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial bonds, there
are a variety of hybrid and special types of municipal obligations as well as
numerous differences in the security of municipal obligations both within and
between the two principal classifications above.
Tax-Free Fund and Municipal Fund may purchase municipal instruments that are
backed by letters of credit issued by foreign banks that have a branch, agency
or subsidiary in the United States. Such letters of credit, like other
obligations of foreign banks, may involve credit risks in addition to those of
domestic obligations, including risks relating to future political and economic
developments, nationalization, foreign governmental restrictions such as
exchange controls and difficulties in obtaining or enforcing a judgment against
a foreign bank (including branches).
For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal obligations that are not general obligation bonds is
made by the Adviser on the basis of the characteristics of the obligation as
described above, the most significant of which is the source of funds for the
payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a small
number of institutional investors such as a Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the 1933 Act prior to offer and sale, unless an exemption from such
registration is available, municipal obligations which are not publicly offered
may nevertheless be readily marketable. A secondary market may exist for
municipal obligations which were not publicly offered initially.
Municipal obligations purchased for a Fund are subject to the policy on
holdings of securities which are not readily marketable contained in the Fund's
Prospectus. The Adviser determines whether a municipal obligation is liquid
based on whether it may be sold in a reasonable time consistent with the
customs of the
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municipal markets (usually seven days) at a price (or interest rate) which
accurately reflects its value. The Adviser believes that the quality standards
applicable to each Fund's investments enhance liquidity. In addition, standby
commitments and demand obligations also enhance liquidity.
Yields on municipal obligations depend on a variety of factors, including money
market conditions, municipal bond market conditions, the size of a particular
offering, the maturity of the obligation and the quality of the issue. High
quality municipal obligations tend to have a lower yield than lower rated
obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
STANDBY COMMITMENTS
- -------------------
In order to enhance the liquidity, stability or quality of municipal
obligations, Prime Obligations Fund, Plus Fund, Money Market Fund, Tax-Free
Fund and Municipal Fund may each acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a put, demand feature or "standby commitment", depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or foreign
banks supporting the other party's ability to purchase the security from the
Fund. The right to sell may be exercisable on demand or at specific
intervals, and may form part of a security or be acquired separately by the
Fund. In considering whether a security meets a Fund's quality standards, the
Adviser will look to the creditworthiness of the party providing the Fund with
the right to sell.
The Funds each value municipal obligations which are subject to standby
commitments at amortized cost. The exercise price of the standby commitments
is expected to approximate such amortized cost. No value is assigned to the
standby commitments for purposes of determining the Fund's net asset value.
Since the value of a standby commitment is dependent on the ability of the
standby commitment writer to meet its obligation to repurchase, the policy of
each Fund that may enter into such transactions is
16
<PAGE>
to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Fund.
Management of the Trust understands that the Internal Revenue Service has
issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. The Internal Revenue
Service has also issued private letter rulings to certain taxpayers (which do
not serve as precedent for other taxpayers, and which are applicable only to
the taxpayer requesting the ruling and which have, on occasion, been reversed
by the Internal Revenue Service) to the effect that they are considered the
owners of the municipal obligations subject to standby commitments so that the
interest on such instruments will be tax-exempt income to them. The Internal
Revenue Service has subsequently announced that it will not ordinarily issue
advance letter rulings as to the identity of the true owner of property in
cases involving the sale of securities or participation interests therein if
the purchaser has the right to cause the security, or the participation
interest therein, to be purchased by either the seller or a third party. The
Tax-Free Fund and Municipal Fund each intends to take the position that it is
the owner of any municipal obligations acquired subject to a standby commitment
or acquired or held with certain other types of put rights and that its
distribution of tax-exempt interest earned with respect to such municipal
obligations will be tax-exempt for its shareholders. There is no assurance
that standby commitments will be available to these Funds and neither Fund has
assumed that such commitments will be available under all market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the Investment Company Act and the rules thereunder and as used
in the Prospectus and this Statement of Additional Information, means the
lesser of (1) 67% of the shares of that Fund present at a meeting if the
holders of more than 50% of the outstanding shares of that Fund are present in
person or by proxy, or (2) more than 50% of the outstanding shares of that
Fund). Investment restrictions that involve a maximum percentage of securities
or assets shall not be considered to be violated unless an excess over the
percentage occurs immediately after, and is caused by, an acquisition or
encumbrance of securities or assets of, or borrowings by or on behalf of, a
Fund, with the exception of borrowings permitted by Investment Restriction (3).
17
<PAGE>
Accordingly, the Trust may not on behalf of any Fund:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act. This restriction
does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act.
(2) purchase securities if such purchase would cause more than 25% or more in
the aggregate of the market value of the total assets of a Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, however there is no limitation
with respect to, and each Fund (other than Money Market Fund and Plus
Fund) reserves freedom of action, when otherwise consistent with its
investment policies, to concentrate its investments in obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities,
obligations (other than commercial paper) issued 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. Each of Money Market Fund and Plus Fund may
concentrate its investments in obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities and repurchase
agreements and securities loans collateralized by such obligations and
will invest more than 25% of its total assets in obligations issued or
guaranteed by banks (whether foreign or domestic) and repurchase
agreements and securities loans collateralized by such obligations.
However, if adverse economic conditions prevail in the banking industry,
each of Money Market Fund and Plus Fund may, for defensive purposes,
temporarily invest less than 25% of the value of its total assets in 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.
(3) borrow money, except (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through reverse repurchase agreement in
amounts up to 331/3% 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, and (d) the Fund may
purchase securities on margin to the extent permitted by applicable law.
18
<PAGE>
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each Funds 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 a 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.
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 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 Board of Trustees
of the Trust has adopted the following non-fundamental policies which may be
changed or amended by action of the Board of Trustees without approval of
shareholders. Accordingly, the Trust may not, on the behalf of any Fund:
(a) invest in companies for the purpose of exercising control or
management.
(b) invest more than 10% of a 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 exceed 5%
of its net assets.
(d) make short sales of securities, except short sales against the box.
Pursuant to SEC Rule 2a-7, under the Investment Company Act, each fund may not
invest more than 5% of its total assets (taken at
19
<PAGE>
amortized cost) 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). A Fund 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. Each Fund, other than
the Tax-Free Fund and Municipal Fund, may only purchase "First Tier Securities"
as defined below. Securities which are rated in the highest short-term rating
category by at least two Nationally Recognized Statistical Rating Organizations
("NRSROs"), or if only one NRSRO has assigned a rating by that NRSRO, are
"First Tier Securities". Securities rated in the top two short-term rating
categories by at least two NRSROs, or if only one NRSRO has assigned a rating,
by that NRSRO, but which are not First Tier Securities, are "Second Tier
Securities". Pursuant to SEC Rule 2a-7 the foregoing operating policies are
not applicable to Tax-Free Fund and Municipal Fund. With respect to 75% of
each Fund's assets, not more than 10% of such Fund's total assets may be
invested in securities issued by or subject to demand features or guarantees
from the same issuer. A Tax-Exempt Fund's investment in conduit securities
(Municipal Securities providing for repayment by a person other than the
municipal issuer) which are Second Tier securities are limited to 5% of the
Fund's total assets (1% per issuer). "NRSROs" include Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Duff & Phelps, Inc., Fitch
Investors Service, Inc., IBCA Limited and its affiliate IBCA Inc., and Thomson
BankWatch, Inc. For a description of their rating categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's net asset value. "U.S. Government securities"
shall mean securities issued or guaranteed by the U.S. Government or any of its
agencies, authorities or instrumentalities.
TRUSTEES AND OFFICERS
Information pertaining to the Board of Trustees and officers of the Trust is
set forth below. Trustees and officers deemed to be "interested persons" of
the Trust for purposes of the Investment Company Act are indicated by an
asterisk.
20
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- ------------------
Ashok N. Bakhru, 53 Chairman Executive Vice President -
1325 Ave. of Americas & Trustee Finance and Administration and
NY, NY 10019 Chief Financial Officer, Coty Inc.
(since April 1996); President, ABN
Associates (since June 1994) Retired.
Senior Vice President of Scott Paper
until June 1994 Company; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of the
Walnut Street Theater.
*David B. Ford, 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 Goldman Sachs Asset
Management (since December 1994).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996);
New York, NY 10004 President, MFS Retirement
Services Inc., of Massachusetts
Financial Services (prior thereto).
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
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 Goldman
Sachs Asset Management (since
November 1995); Limited Partner of
21
<PAGE>
Goldman Sachs (1994 to November
1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of
Bryn Mawr College Josiah Macy, Jr, Foundation Bryn
Mawr, PA 19010 (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 York,
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).
22
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, One
Northfield Plaza 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
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
701 Morningside Drive Financial and Administrative
Lake Forest, IL 60045 Officer, (February 1987 to June 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
70 West Madison St. Partners, Inc. (since 1990);
Suite 1400 President and Chief Executive
Chicago, IL 60602 Officer, Microdot, Inc.
(a diversified manufacturer
of fastening systems and
connectors)(January 1984 to October
1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, Goldman Sachs Asset
New York, NY Management (since April 1994);
10004 Assistant Treasurer, Goldman Sachs
Funds Management, Inc.
(since March 1993); Vice Pre-
sident, Goldman Sachs (since
March 1990).
23
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY Investors Bank and Trust,
10004 November 1993 to July 1995);
Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL Director Shareholder Servicing
60606 (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs
4900 Sears Tower President (since April 1985); Manager of
Chicago, IL Shareholder Servicing of GSAM
60606 since November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street Goldman Sachs Asset Management
New York, NY (since February 1994); Vice
10004 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
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, Goldman Sachs Asset Management
(since November 1993); Associate of
Shereff Friedman,Hoffman & Goodman
(prior thereto).
24
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
*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 Robinson, 25 Assistant Administrative Assistant,
85 Broad Street Secretary Goldman Sachs since
New York, NY 10004 January 1994. Formerly at
Cleary Gottlieb, Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, Goldman
New York, NY 10004 Sachs Asset Management (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, Goldman Sachs Asset
Management (since 1993); Funds
Trading Assistant, GSAM (1993-1995);
Compliance Analyst, Prudential
Insurance (1991-1993).
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 ___,
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.
25
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal period ended December
31, 1996:
<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.** $_________ $0 $_________
Ashok N. Bakhru $_________ $0 $_________
Marcia L. Beck*** $_________ $0 $_________
David B. Ford $_________ $0 $_________
Alan A. Shuch $_________ $0 $_________
Jackson W. Smart $_________ $0 $_________
William H. Springer $_________ $0 $_________
Richard P. Strubel $_________ $0 $_________
______________
</TABLE>
* The Goldman Sachs Mutual Funds consisted of ____ mutual funds,
including the five portfolios of the Trust, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
26
<PAGE>
THE ADVISER, DISTRIBUTOR AND TRANSFER AGENT
THE ADVISER
- -----------
GSAM, a separate operating division of Goldman Sachs, acts as the investment
adviser to the Funds. Under the Management Agreement between Goldman Sachs and
the Trust on behalf of the Funds, GSAM, subject to the supervision of the Board
of Trustees of the Trust and in conformity with the stated policies of each
Fund, acts as investment adviser and directs the investments of the Funds. In
addition, GSAM administers the Funds' 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 .205% of each Fund's
average daily net assets. GSAM has agreed to reduce or otherwise limit the
daily expenses (excluding fees paid to Service Organizations, advisory fees,
taxes, interest, brokerage and litigation, indemnification and other
extraordinary expenses) of each Fund, on an annualized basis, to .01% of the
average daily net assets of that Fund. The amount of such reductions or limits,
if any, are calculated monthly and are based on the cumulative difference
between a Fund's estimated annualized expense ratio and the expense limit for
that Fund. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed not to impose all or a
portion of its advisory fee and/or to reduce or otherwise limit the Fund's
annual total operating expenses (excluding fees of Service Organizations ) to
.18% of average daily net assets.
The Trust, on behalf of each Fund, is responsible for all expenses other than
those expressly borne by GSAM under the Funds' Management Agreement. The
expenses borne by Shares of each Fund 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 Shares 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 Trust), expenses of preparing and setting in
type prospectuses, statements of additional information, proxy material,
reports and notices, the printing and distribution of the same to Shareholders
and regulatory authorities, its proportionate share of the compensation and
expenses of its "non-interest-
27
<PAGE>
ed" Trustees, and extraordinary expenses incurred by the Portfolios.
For the fiscal years ended December 31, 1996, December 31, 1995 and December
31, 1994 the amount of the management fee incurred by each Fund was as follows:
Dec. 1996 Dec. 1995 Dec. 1994
--------- --------- ---------
Prime Obligations Fund 1,692,924 695,689(4)
Money Market Fund(1) 211,326 64,294
Treasury Obligations Fund 565,477 225,733(4)
Government Fund(2) 263,804 50,687(4)
Tax Free Money Market Fund(3) 25,151 0
- ------------------------------------------
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The Information presented for the period ended December 31, 1994 reflects
eleven months of operations.
GSAM has agreed that it will not impose a portion of its fee referred to above,
pursuant to applicable contracts. Had such fees been imposed, the following
additional fees would have been incurred by these Funds for the periods
indicated:
Dec. 1996 Dec. 1995 Dec. 1994
--------- ----------- ----------
Prime Obligations Fund $3,173,924 $1,609,383
Treasury Obligations Fund 1,747,326 554,447
Government Fund(2) 493,804 128,944
Money Market Fund(1) 1,059,477 482,154
Tax Free Money Market Fund(3) 270,151 53,176
- ------------------------------------------
(1) Commenced operations April 6, 1993.
(2) Commenced operations May 18, 1994.
(3) Commenced operations July 19, 1994.
The Management Agreement entered into on behalf of the Funds was most recently
approved by the Trustees, including the "non-interested" Trustees, on April 23,
1997. The Management Agreement will remain in effect until June 30, 1997 and
will continue in effect thereafter only if such continuance is specifically
approved at least annually by a majority of the Trustees or by a vote of a
majority of the outstanding voting securities of the particular Fund (as
defined in the Investment Company Act) and, in either case, by a majority of
"non-interested" Trustees.
Goldman Sachs has authorized any of its directors, partners, officers and
employees who has been elected or appointed as a Trustee or officer of the
Trust to serve in the capacities in which he or she has been elected and
appointed.
28
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Fund during various periods of 1996, 1995 and 1994 to the extent such expenses
would have caused each Fund'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:
12/31/96 12/31/95 1/31/94
-------- -------- -------
Prime Obligations Fund $382,318 $ -0-
Money Market Fund 420,234 N/A
Treasury Obligations 280,395 -0-
Government Fund(1) 197,008 98,125
Tax Free Money Market Fund 83,376 N/A
__________________________
(1) Commenced operations April 6, 1993
Each Fund may use any name derived from the name "Goldman Sachs" only as long
as its Management Agreement remains in effect. Each Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated with respect to any particular Fund without penalty by vote of a
majority of the Trustees or a majority of the outstanding voting securities of
that Fund or by either party upon sixty (60) days' written notice to GSAM or by
GSAM without penalty at any time on 90 days' written notice to the Trust.
In managing the Tax-Free Money Market Fund, GSAM will draw upon the extensive
research generated by Goldman Sachs' Municipal Credit Group. The Credit
Group's research team continually reviews current information regarding the
issuers of municipal and other tax-exempt securities, with particular focus on
long-term creditworthiness, short-term liquidity, debt service costs, liability
structures, and administrative and economic characteristics.
Under a previous Administration Agreement, GSAM administered each Fund's
business affairs subjet to the supervision of the Trustees. GSAM received a
separate account administration fee from the Fund with respect to such
services.
For the fiscal years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the amounts of account administration fees paid to GSAM by
the Funds were as follows:
Dec. 1996 Dec. 1995 Dec. 1994(4)
--------- ----------- ------------
Prime Obligations Fund $5,501,468 $2,789,597
Money Market Fund(1) 3,024,701 835,827
Treasury Obligations Fund 1,836,426 961,040
Government Fund(2) 855,927 193,154
Tax-Free Fund(3) 434,262 35,436
_______________
29
<PAGE>
(1) Commenced operations May 18, 1994.
(2) Commenced operations April 6, 1993.
(3) Commenced operations July 19, 1994.
(4) The information presented for the period ended December 31, 1994 reflects
eleven months of operations.
Had fee reductions not been in effect, Government Fund would have paid
account administration fees of $223,500 for the eleven months ended December
31,1994, and Tax-Free Fund would have paid account administration fees of
$92,169 for the period from July 19, 1994 (commencement of operations) to
December 31, 1994. The Money Market and Tax-Free Funds would have paid account
administration fees of $3,028,701 and $468,262, respectively, for the period
February 1, 1995 to January 31, 1996.
THE DISTRIBUTOR AND TRANSFER AGENT
- ----------------------------------
Goldman Sachs acts as principal underwriter and distributor of each Fund's
shares pursuant to a Distribution Agreement with the Trust which was most
recently approved by the Board of Trustees on April 23, 1997. Goldman Sachs
also serves as the transfer agent of each Fund. Goldman Sachs provides
customary transfer agency services to the Funds, including the handling of
shareholder communications, the processing of shareholder transactions, the
maintenance of shareholder account records, payment of dividends and
distributions and related functions. Goldman Sachs currently imposes no fees
under its transfer agency agreement.
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 ___, 1996,
Goldman Sachs and its consolidated subsidiaries had assets of approximately
$____ billion and partners' capital of $___ billion. Goldman Sachs became
registered as an investment adviser in 1981. As of March ___, 1997, Goldman
Sachs, together with its affiliates, acted as investment adviser, administrator
or distributor for approximately $___ billion in total assets.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms. GSAM uses its best efforts to
obtain execution of portfolio transactions at prices which are advantageous to
each Fund and at reasonably competitive spreads or (when a disclosed commission
is being charged) at reasonably competitive commission rates. In seeking such
execution, GSAM will use its best judgment in evaluating the terms of a
transaction, and will give 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
30
<PAGE>
certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation,
reliability, experience and financial condition of the firm, the value and
quality of the services rendered by the firm in this and other transactions,
and the reasonableness of the spread or commission, if any. Securities
purchased and sold by the Funds are generally traded in the over-the-counter
market on a net basis (i.e., without commission) through broker-dealers and
banks acting for their own account rather than as brokers, or otherwise involve
transactions directly with the issuer of such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in many types
of municipal and money market instruments. Its activities in this regard could
have some effect on the markets for those instruments which the Funds buy, hold
or sell. An order has been granted by the SEC under the Investment Company Act
which permits the Funds to deal with Goldman Sachs in transactions in certain
taxable securities in which Goldman Sachs acts as principal. As a result, the
Funds may trade with Goldman Sachs as principal subject to the terms and
conditions of such exemption.
Under the Investment Company Act, the Funds are prohibited from purchasing any
instrument of which Goldman Sachs is a principal underwriter during the
existence of an underwriting or selling syndicate relating to such instrument,
absent an exemptive order (the order referred to in the preceding paragraph
will not apply to such purchases) or the adoption of and compliance with
certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of
the Trust's assets that may be invested in any single offering. Accordingly,
in view of Goldman Sachs' active role in the underwriting of debt securities, a
Fund's ability to purchase debt securities in the primary market may from time
to time be limited.
In certain instances there may be securities which are suitable for a Fund's
portfolio as well as for that of another fund of the Trust or one or more of
the other clients of GSAM. Investment decisions for each Fund and for GSAM's
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for
only one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security 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
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allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security in a particular transaction as far as a
Fund is concerned. Each Fund believes that over time its ability to
participate in volume transactions will produce better executions for the
Funds.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: [insert names]
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund and
Treasury Obligations Fund) is determined by the Funds' custodian as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New
York time) (in the case of the Government Fund and Treasury Obligations Fund,
net asset value is determined at 5:00 p.m. New York time) on each Business Day.
A Business Day means any day on which the New York Stock Exchange is open,
except for days on which banks in Chicago, Boston or New York are closed on
local holidays. Such holidays include: New Year's Day, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, the Fourth of July, Labor Day,
Columbus Day, Veteran's Day, Thanksgiving Day and Christmas Day.
Each Fund's portfolio securities are valued using the amortized cost method of
valuation in an effort to maintain a constant net asset value of $1.00 per
share, which the Trustees has determined to be in the best interests of each
Fund and its shareholders. 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 certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a
Fund would receive if it sold the instrument. During such periods, the yield
to an investor in a Fund may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on shares of the Funds may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Fund resulted in a lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Fund on that day, than would result from investment in a fund
utilizing solely market values, and existing investors in the Fund would
receive less investment income. The converse would apply in a period of rising
interest rates.
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The Trustees has established procedures designed to stabilize, to the extent
reasonably possible, each Fund's price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of each Fund's
portfolio by the Trustees, at such intervals as it deems appropriate, to
determine whether such Fund's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per share based on amortized cost, as well as
review of the methods used to calculate the deviation. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any,
will be initiated. In the event the Board of Trustees determines that a
deviation exists which may result in material dilution or other unfair results
to investors or existing shareholders, it will take such corrective action as
it regards to be necessary and appropriate, including the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity; withholding part or all of dividends or payment of
distributions from capital or capital gains; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations
or equivalents. In addition, in order to stabilize the net asset value per
share at $1.00 the Trustees has the authority (1) to reduce or increase the
number of shares outstanding on a pro rata basis, and (2) to offset each
shareholder's pro rata portion of the deviation between the net asset value per
share and $1.00 from the shareholder's accrued dividend account or from future
dividends. Each Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no return is earned, would tend to
lower the yield on such Fund's shares.
In order to continue to use the amortized cost method of valuation each Fund's
investments, including repurchase agreements, must be U.S. dollar-denominated
instruments which the Trustees determines present minimal credit risks and
which are at the time of acquisition rated by the requisite number of NRSROs in
one of the two highest short-term rating categories or, in the case of any
instrument that is not so rated, of comparable quality as determined by GSAM.
Also, each Fund must maintain a dollar-weighted average portfolio maturity (not
more than ninety (90) days) appropriate to its objective of maintaining a
stable net asset value of $1.00 per share and may not purchase any instrument
with a remaining maturity of more than thirteen (13) months. However, a Fund
may also, consistent with the provisions of the above-mentioned rule, invest in
securities with a stated maturity of more than thirteen (13) months, if (i) the
security is a floating or variable rate security with certain demand and
interest rate reset features and (ii) the security, except in the case of
Tax-Free Fund and Municipal Fund, is a First Tier Security.
The proceeds received by each Fund for each issue or sale of its shares, and
all net investment income, realized and unrealized gain and proceeds thereof,
subject only to the rights of credi-
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tors, will be specifically allocated to such Fund and constitute the underlying
assets of that Fund. The underlying assets of each Fund will be segregated on
the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses are
allocated in proportion to the net asset values of the respective Funds except
where allocations of direct expenses can otherwise be fairly made. In addition,
within each Fund, FST Shares, FST Administration Shares, FST Service Shares and
FST Preferred Shares (if any) will be subject to different expense structures
(see "Organization and Capitalization").
REDEMPTIONS
The Trust may suspend the right of redemption of shares of a Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed for regular trading other than customary weekend and holiday closings
or during which trading on the New York Stock Exchange is restricted, (ii) when
the SEC determines that a state of emergency exists which may make payment or
transfer not reasonably practicable, (iii) as the SEC may by order permit for
the protection of the shareholders of the Trust or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption of the Fund's shares.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from a Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the net asset value of the shares being redeemed. If a shareholder
receives a distribution in kind, he or she should expect to incur transaction
costs when he or she converts the securities to cash.
A FST shareholder of any Fund with balances in excess of $100 million may elect
to have a special account with State Street for the purpose of redeeming shares
from its account in that Fund by check. When State Street receives a completed
signature card and authorization form, the shareholder will be provided with 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 fractional shares will be redeemed to cover the amount of the check.
Cancelled checks will be returned to the shareholder by State Street. The Trust
and Goldman Sachs each reserves the right to waive the minimum requirement.
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The check redemption privilege enables a shareholder to receive the dividends
declared on the shares 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 an account. If the amount of a check is
greater than the value of shares held in the shareholder's account, the check
will be returned unpaid, and the shareholder may be subject to extra charges.
Goldman Sachs reserves the right to impose conditions on, limit the
availability of or terminate the check redemption privilege at any time with
respect to a particular shareholder or Service Organization in general. The
Trust and State Street reserve the right at any time to suspend the check
redemption privilege 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 the Funds.
CALCULATION OF YIELD QUOTATIONS
Each Fund's yield quotations are calculated in accordance with a standard
method prescribed by the rules of the SEC. Under this method, the yield
quotation is based on a hypothetical account having a balance of exactly one
share at the beginning of a seven-day period.
Yield, effective yield and tax equivalent yield are calculated separately for
each class of a Fund's shares. Each class of Share is subject to different
fees and expenses and, consequently, may have differing yields for the same
period.
The yield quotation is computed as follows: the net change, exclusive of
capital changes (i.e., realized gains and losses from the sale of securities
and unrealized appreciation and depreciation), in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the base
period is determined by dividing the net change in value by the value of the
account at the beginning of the base period. This base period return is then
multiplied by 365/7 with the resulting yield figure carried to the nearest
100th of 1%. Such yield quotation shall take into account all fees that are
charged to a Fund.
Each Fund also may advertise a quotation of effective yield for a seven (7)
calendar day period. Effective yield is computed by compounding the
unannualized base period return determined as in the preceding paragraph by
adding one (1) to that return, raising the sum to the 365/7 power and
subtracting one from the result, according to the following formula:
Effective Yield=[(base period return + 1)] - 1.
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<PAGE>
Treasury Instruments, Federal Tax-Free and Municipal Funds may also advertise a
tax-equivalent yield which is computed by dividing that portion of a Fund's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the Fund
that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or return for
a stated period of time, the return for a Fund will fluctuate from time to time
and does not provide a basis for determining future returns. Return is a
function of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to a Fund. The return of each Fund may not be
comparable to other investment alternatives because of differences in the
foregoing variables and differences in the methods used to value portfolio
securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Fund, with
respect to FST Shares, FST Administration Shares, FST Service Shares and FST
Preferred Shares for the seven-day period ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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."
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<PAGE>
In the absence of such fee reductions, the yield, effective yield and the
tax-equivalent yield of each Fund for the same period would have been as
follows:
<TABLE>
<CAPTION>
Effective Tax-Equivalent
Yield Yield Yield
------------------------------------
<S> <C> <C> <C>
Prime Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Money Market Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Treasury Obligations Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Government Fund:
FST Shares _____ _____ N/A
FST Administration Shares _____ _____ N/A
FST Service Shares _____ _____ N/A
FST Preferred Shares _____ _____ N/A
Tax-Free Fund:
FST Shares _____ _____ _____
FST Administration Shares _____ _____ _____
FST Service Shares _____ _____ _____
FST Preferred Shares _____ _____ _____
</TABLE>
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%.
From time to time any Fund may publish an indication of its past performance as
measured by independent sources such as Lipper Analytical Services,
Incorporated, Weisenberger Investment Companies Service, Donoghue's Money Fund
Report, Barron's, Business Week, Changing Times, Financial World, Forbes,
Money, Personal Investor, Sylvia Porter's Personal Finance, and The Wall Street
Journal.
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 potential benefits to be derived from
asset allocation strategies and the Goldman Sachs mutual funds that may form
part of such an asset allocation strategy. Such advertisements and information
may also include a discussion of GSAM's current economic outlook
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<PAGE>
and domestic and international market views and recommend periodic tactical
modifications to current asset allocation strategies. Such advertisements and
information may also highlight or summarize the services that GSAM and/or its
affiliates provide in support of an asset allocation program.
TAX INFORMATION
Each Fund has qualified and has elected or intends to qualify and elect to be
treated as a separate regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). Such qualification
does not involve supervision of management or investment practices or policies
by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Fund must, among
other things, (a) derive at least 90% of its annual gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its annual gross
income from the sale or other disposition of stock, securities or certain other
investments held less than three months; and (c) diversify its holdings so
that, at the end of each quarter of its taxable year, (i) at least 50% of the
market value of the Fund's total (gross) assets is represented by cash and cash
items (including receivables), U.S. Government securities, securities of other
regulated investment companies and other securities limited, in respect of any
one issuer, to an amount not greater in value than 5% of the value of the
Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's total assets is
invested in the securities (other than U.S. Government securities and
securities of other regulated investment companies) of any one issuer or two or
more issuers controlled by the Fund and engaged in the same, similar or related
trades or businesses. For purposes of these requirements, participation
interests will be treated as securities, and the issuer will be identified on
the basis of the market risk and credit risk associated with any particular
interest. Certain payments received with respect to such interests, such as
commitment fees and certain facility fees, may not be treated as income
qualifying under the 90% test.
Each Fund, as a regulated investment company, will not be subject to federal
income tax on any of its net investment income and net realized capital gains
that are distributed to shareholders with respect to any taxable year in
accordance with the Code's timing requirements, provided that the Fund
distributes at least 90% of its investment company taxable income (generally
all of its net taxable income other than "net capital gain," which is the
excess of net long-term capital gain over net short-term capital loss) for such
year, and in the case of any Fund that earns tax-exempt interest, at least 90%
of the excess of the tax-exempt interest
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<PAGE>
it earns over certain disallowed deductions. A Fund will be subject to federal
income tax at regular corporate rates on any investment company taxable income
or net capital gain that it does not distribute for a taxable year. In order
to avoid a nondeductible 4% federal excise tax, a Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98%
of its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous
year that were not distributed in such year and on which the Fund paid no
federal income tax.
Dividends paid by a Fund from taxable net investment income (including income
attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of
net short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of shareholders. Such distributions will not
qualify for the corporate dividends-received deduction. Distributions paid by
a Fund from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of a Fund have been held by such shareholders,
and also will not qualify for the corporate dividends-received deduction. A
Fund's net realized capital gains for a taxable year are computed by taking
into account any capital loss carryforward of that Fund.
Distributions paid by Tax-Free Fund or Municipal Fund from tax-exempt interest
received by it and properly designated as "exempt-interest dividends" will
generally be exempt from regular federal income tax, provided that at least 50%
of the value of the applicable Fund's total assets at the close of each quarter
of its taxable year consists of tax-exempt obligations, i.e., obligations
described in Section 103(a) of the Code (not including shares of other
regulated investment companies that may pay exempt-interest dividends, because
such shares are not treated as tax-exempt obligations for this purpose).
Distributions paid by the other Funds from any tax-exempt interest they may
receive will not be tax-exempt, because they will not satisfy the 50%
requirement described in the preceding sentence. A portion of any tax-exempt
distributions attributable to interest on certain "private activity bonds", if
any, received by a Fund may constitute tax preference items and may give rise
to, or increase liability under, the alternative minimum tax for particular
shareholders. In addition tax-exempt distributions of a Fund may be considered
in computing the "adjusted current earnings" preference item of its corporate
shareholders in determining the corporate alternative minimum tax and the
corporate environmental tax. To the extent that a Fund invests in certain
short-term instruments, including repurchase agreements, the interest on which
is not exempt from federal income tax, any distributions of
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<PAGE>
income from such investments will be taxable to shareholders as ordinary
income. All or substantially all of any interest on indebtedness incurred
directly or indirectly to purchase or carry shares of Tax-Free Fund or
Municipal Fund will generally not be deductible. The availability of
tax-exempt obligations and the value of these Funds may be affected by
restrictive tax legislation enacted in recent years.
In purchasing municipal obligations, Tax-Free Fund and Municipal Fund each
relies on opinions of nationally-recognized bond counsel for each issue as to
the excludability of interest on such obligations from gross income for federal
income tax purposes. Each Fund does not undertake independent investigations
concerning the tax-exempt status of such obligations, nor does it guarantee or
represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis in each share so received equal to the amount of cash
they would have received had they elected to receive cash.
Money Market Fund and/or Plus Fund may be subject to foreign withholding or
other foreign taxes with respect to its investments in certain securities of
foreign entities. These taxes may be reduced under the terms of applicable
U.S. income tax treaties in some cases, and the applicable Fund intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although neither Fund anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by either Fund,
that Fund could make an election under Code Section 853 to permit its
shareholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by the Fund in foreign
countries. In the event such an election is made, shareholders will be
required to include their pro rata share of such taxes in gross income and will
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the Code. Shareholders who are
precluded from taking such credits or deductions will nevertheless be taxed on
their pro rata share of the foreign taxes included in their gross income,
unless they are otherwise exempt from federal income tax.
Each Fund will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt shareholders.
Under the backup withholding provisions of Code Section 3406, all such
distributions may be subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the Fund with
their taxpayer identification number or with certain certifications required by
the Internal Revenue Service or if the Internal
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<PAGE>
Revenue Service or a broker notifies a Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding as a result of failure to report interest or dividend income.
However, any taxable distributions from Tax-Free Fund or Municipal Fund will
not be subject to backup withholding if the Fund reasonably estimates that at
least 95% of its distributions will be exempt interest dividends. Each Fund
may refuse to accept an application that does not contain any required taxpayer
identification number or certification that the number provided is correct or
that the investor is an exempt recipient. If the withholding provisions are
applicable, any such distributions, whether taken in cash or reinvested in
shares, will be reduced by the amounts required to be withheld. Investors may
wish to consult their tax advisors about the applicability of the backup
withholding provisions.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder on the shareholder's
federal income tax return. The Funds will inform shareholders of the federal
income tax status of their distributions after the end of each calendar year,
including, in the case of the Tax-Free Fund and the Municipal Fund, the amounts
that qualify as exempt-interest dividends and any portions of such amounts that
constitute tax preference items under the federal alternative minimum tax.
Shareholders who received exempt-interest dividends and have not held their
shares of the applicable Fund for its entire taxable year may have designated
as tax-exempt or as a tax preference item a percentage of their distributions
which is not exactly equal to a proportionate share of the amount of tax-exempt
interest or tax preference income earned during the period of their investment
in such Fund. Each shareholder should consult his or her own tax advisor to
determine the tax consequences of an investment in the Fund in the
shareholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Shareholders should consult their tax advisers for more
information.
Assuming that each Fund qualifies as a regulated investment company for federal
income tax purposes, each Fund, as a series of a Massachusetts business trust,
will not be subject to any income, franchise or corporate excise tax in
Massachusetts.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each shareholder who is not a U.S.
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<PAGE>
person should consult his or her tax adviser regarding the U.S. and non-U.S.
tax consequences of ownership of shares of a Fund, including the possibility
that such a shareholder may be subject to a U.S. nonresident alien withholding
tax at a rate of 30% (or at a lower rate under an applicable U.S. income tax
treaty) on certain distributions from a Fund or to backup withholding on
certain payments if a current IRS Form W-8 or acceptable substitute is not on
file with the Funds.
The Funds may be subject to state or local taxes in jurisdictions in which the
Funds may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of the Trust and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in the Funds may have tax consequences for
shareholders different from those of a direct investment in the Funds'
securities. Shareholders should consult their own tax advisers concerning
these matters. For example, in such states or localities it may be appropriate
for shareholders to review with their tax advisers the state income and, if
applicable, intangibles tax consequences of investments by the Funds in
securities issued by the particular state or the U.S. Government or its various
agencies or instrumentalities, because many states exempt from personal income
tax distributions by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or exempt from intangibles tax the value of the shares of such companies
attributable to such obligations, subject to certain state-specific
requirements and/or limitations.
This discussion of the tax treatment of the Funds and their shareholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information, which are subject to change either prospectively or retroactively.
ORGANIZATION AND CAPITALIZATION
Goldman Sachs Money Market Trust was established as a Massachusetts business
trust by a Declaration of Trust dated December 6, 1978, and reorganized, as
part of Goldman Sachs Trust, as a Delaware business trust, by a Declaration of
Trust dated January 28, 1997. Each of the Funds became a series of the Trust
pursuant to a reorganization which occurred on April 30, 1997.
Each shareholder is deemed to have expressly assented and agreed to the terms
of the Declaration of Trust and is deemed to be party thereto. The authorized
capital of the Trust consists of an unlimited number of shares of beneficial
interest. The Board of Trustees has authority under the Declaration of Trust
to create and classify shares of beneficial interest in separate series without
further action by shareholders. The Declaration of Trust further authorizes
the Board of Trustees to classify or reclassify any series or portfolio of
shares into one or more
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<PAGE>
classes. The Board of Trustees has authorized the issuance of up to four
classes of shares of each of the Funds: FST Shares, FST Service Shares, FST
Administration Shares and FST Preferred Shares.
Each FST Share, FST Administration Share, FST Service Share and FST Preferred
Share of a Fund represents an equal proportionate interest in the assets
belonging to such Fund. It is contemplated that most shares will be held in
the accounts of which the record owner is a bank or other institution acting,
directly or through an agent, as nominee for its customers who are the
beneficial owners of the shares or another organization designated by such bank
or institution. FST Shares may be purchased for accounts held in the name of
an investor or institution that is not compensated by the Fund for services
provided to the institution's investors. FST Administration Shares may be
purchased for accounts held in the name of an institution that provides certain
account administration services to its customers, including maintenance of
account records and processing orders to purchase, redeem and exchange FST
Administration Shares. FST Administration Shares of a Fund bear the cost of
administration fees at the annual rate of up to .25 of 1% of the average daily
net assets of such Shares. FST Preferred Shares may be purchased for accounts
held in the name of an institution that provides certain account administration
services to its customers, including acting directly or through an agent, as
the sole shareholder of record, maintain account records of its customers and
processing orders to purchase, redeem and exchange FST Preferred Shares. FST
Preferred Shares of a Fund bear the cost of preferred administration fees at an
annual rate of up to 0.10% of the average daily net assets of such shares. FST
Service Shares may be purchased for accounts held in the name of an institution
that provides certain account administration and shareholder liaison services
to its customers, including maintenance of account records, processing orders
to purchase, redeem and exchange FST Service Shares, responding to customer
inquiries and assisting customers with investment procedures. FST Service
Shares of a Fund bear the cost of service fees at the annual rate of up to .50
of 1% of the average daily net assets of such Shares.
It is possible that an institution or its affiliates may offer different
classes of shares to its customers and thus receive different compensation with
respect to different classes of shares of a Fund. In the event a Fund is
distributed by sales persons or any other persons, they may receive different
compensation with respect to different classes of shares of a Fund. FST
Administration Shares, FST Preferred Shares and FST Service Shares each have
certain exclusive voting rights on matters relating to their respective plans.
Shares of each class may be exchanged only for shares of the same class in
another Fund. Except as described above, the four classes of shares are
identical. Certain aspects of the shares may be altered, after advance
43
<PAGE>
notice to shareholders, if it is deemed necessary in order to satisfy certain
tax regulatory requirements.
Each FST Share, FST Service Share, FST Administration Share and FST Preferred
Share of a Fund is entitled to one vote per share; however, separate votes will
be taken by the Fund or class (or by more than one fund of the Trust or class
voting as a single class if similarly affected) on matters affecting only the
Fund or class (or those affected Funds or classes) or as otherwise required by
law. Shares are freely transferable and have no preemptive, subscription or
conversion rights. All shares issued and outstanding are fully paid and
non-assessable. The Declaration of Trust provides for shareholder voting only
for the election or removal of one or more Trustees, if a meeting is called for
that purpose, and for certain other designated matters. The Trust does not
generally hold annual or other meetings of shareholders. The shares of the
Trust have non-cumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of
the Trustees if they choose to do so, and, in such event, the holders of the
remaining less than 50% of the shares voting for the election of Trustees will
not be able to elect any person or persons to the Board of Trustees. Each
Trustee serves until the next meeting of shareholders, if any, called for the
purpose of electing or reelecting such Trustee or successor to such Trustee,
and until the election and qualification of such successor, if any, or until
such Trustee sooner dies, resigns, retires or is removed by the shareholders or
two-thirds of the Trustees.
As of April ____, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Prime Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Money Market Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Treasury Obligations Fund:
[update]. As of April __, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Government Fund: [update].
As of April __, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Tax-Free Fund: [update].
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
The Trust is an entity of the type commonly known as a "Delaware business
trust", which is the form in which many mutual funds are organized.
Under Delaware law, the shareholders of the Delaware Trust are not
generally subject to liability for the debts or obligations of the Delaware
Trust. Similarly, Delaware law provides that a Fund will not be liable for the
debts or obligations of any other series of the Delaware Trust. However, no
similar statutory or other authority limiting business trust shareholder
liability
44
<PAGE>
exists in many 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 of the Delaware Trust contains 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 Fund or the Trustees. The Declaration
of Trust of the Delaware Trust provides for indemnification by the relevant
Fund for any loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of Trust of the Delaware Trust also provides that a Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy and judgment
thereon. In view of the above, the risk of personal liability of shareholders
is remote.
On any matter submitted to a vote of the Shareholders of the Trust, all Shares
shall be voted in the aggregate not by individual Fund or Class, except (a)
when required by the 1940 Act, Shares shall be voted by individual Fund or
Class, and (b) when the Trustees have determined that the matter affects the
interests of only one or more Fund or Class, then only the Shareholders of all
such Fund or Classes shall be entitled to vote. As determined by the Trustees
without the vote or consent of Shareholders, on any matter submitted to a vote
of Shareholders, either (i) each whole Share shall be entitled to one vote as
to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote or (ii) each dollar of Net Asset
Value (number of Shares owned times Net Asset Value per share of such Fund or
Class, as applicable) shall be entitled to one vote on any matter on which such
Shares are entitled to vote and each fractional dollar amount shall be entitled
to a proportionate fractional vote. There is no cumulative voting in the
election of Trustees.
In connection with the establishment of one or more Funds or Classes, the
Trustees establishing such Funds or Class may appoint, to the extent permitted
by the Delaware Business Trust Act, separate Trustees with respect to such
Funds or Classes (the "Series Trustees"). Series Trustees may, but are not
required to, serve as Trustees of the Trust or any other Fund or Class of the
Trust. To the extent provided by the Trustee in the appointment of Series
Trustees, the Series Trustees may have, to the exclusion of any other Trustees
of the Trust, all the powers and authorities of Trustees with respect to such
Fund or Class, but may have no power or authority with respect to any other
Fund or Class. Shareholders for a Fund or Class with respect to which Series
Trustees have been appointed shall only be entitled to vote in the election of
such Series Trustees.
Upon the vote of a majority of the Shares Outstanding and entitled to vote of
the Trust or of each Fund to be affected, the
45
<PAGE>
Trustees may (i) sell and convey all or substantially all of the assets of all
Funds or any affected Fund or to another entity which is an open-end investment
company as defined in the 1940 Act, or is a Fund thereof, for adequate
consideration, which may include the assumption of all outstanding obligations,
taxes and other liabilities, accrued or contingent, of the Trust or any
affected Fund, and which may include shares of or interests in such Fund,
entity, or Fund thereof; or (ii) at any time sell and convert into money all or
substantially all of the assets of all Funds or any affected Fund. The
Trustees may take any of the actions specified above without obtaining the vote
of a majority of the outstanding Shares of the Trust or any Fund if a majority
of the Trustees determines, in their sole discretion, that the continuation of
the Trust or Fund is not in the best interests of the Trust, such Fund, or
their respective Shareholders. Also, the Trustees may, without shareholder
approval unless such approval is required by applicable federal law, (i) cause
the Trust to merge or consolidate with or into one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a Fund thereof, (ii) cause the Shares
to be exchanged under or pursuant to any state or federal statute to the extent
permitted by law, or (iii) cause the Trust to incorporate under the laws of
Delaware or any other U.S. jurisdiction. The Trustees may, without Shareholder
approval, invest all or a portion of the assets of any Fund, or dispose of all
or a portion of the assets of any Fund, and invest the proceeds of such
disposition in interests issued by one or more other investment companies
registered under the Investment Company Act. The Trustees may, without
Shareholder approval unless such approval is required by applicable law, cause
a Fund that is organized in the master/feeder fund structure to withdraw or
redeem into assets from the master fund and cause such Fund to invest its
assets directly in securities and other financial instruments or in another
master fund.
In addition to the requirements set forth in Section 3816 of the Delaware
Business Trust Act, the Declaration of Trust provides that a Shareholder may
bring a derivative action on behalf of the Trust only if the following
conditions are met:
(a) Shareholders eligible to bring such derivative action under the
Delaware Business Trust Act who hold at least 10% of the Outstanding Shares of
the Trust, or 10% of the Outstanding Shares of the Fund or Class to which such
action relates, shall join in the request of the Trustees to commence such
action; and
(b) the Trustees may be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such claim.
The Trustees shall be entitled to retain counsel or other advisors in
considering the merits of the request and shall require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
46
<PAGE>
such advisers in the event that the Trustees determine not to bring such
action.
The Declaration of Trust of the Delaware 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.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act
as custodian of the Funds' assets and, in that capacity, maintains the
accounting records and calculates the daily net asset value per share of each
Fund. Its mailing address is P.O. Box 1713, Boston, MA 02105. State Street
has appointed The Northern Trust Company, 50 South LaSalle Street, Chicago,
Illinois 60675 as subcustodian to hold cash and certain securities purchased by
the Funds.
INDEPENDENT ACCOUNTANTS
________________, independent public accounts, One International Place, 100
Oliver Street, Boston, Massachusetts 02110, have been selected as auditors of
the Trust. In addition to audit services, __________________ prepares each
Fund's federal and state tax returns, and provides consultation and assistance
on accounting, internal control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Funds then in existence and conducting
investment operations, including the Statements of Investments as of December
31, 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 December 31, 1996 Annual Report
to the shareholders, are attached hereto and incorporated by reference into
this Statement of Additional Information.
47
<PAGE>
PREFERRED ADMINISTRATION PLAN
The Trust, on behalf of the Funds, has adopted a preferred administration
plan (the "Plan") with respect to the FST Preferred Shares which authorizes the
Funds to compensate Service Organizations for providing certain account
administration services to their customers who are beneficial owners of such
shares. Pursuant to the Plan, the Trust, on behalf of the Fund, will enter into
agreements with Service Organizations which purchase FST Preferred Shares on
behalf of their customers ("Service Agreements"). Under such Service
Agreements the Service Organizations may: (a) act, directly or through an agent,
as the sole shareholder of record and nominee for all customers, (b) maintain
account records for each customer who beneficially owns FST Preferred Shares,
(c) process customer orders to purchase, redeem and exchange FST Preferred
Shares, and handle the transmission of funds representing the customers'
purchase price or redemption proceeds. As compensation for such services, the
Trust, on behalf of the Funds, will pay each Service Organization a service fee
in an amount up to .10% (on an annualized basis) of the average daily net
assets of the FST Preferred Shares of the Fund attributable to or held in the
name of such Service Organization.
For the fiscal year ended December 31, 1996 with respect to each Fund, the
amount of preferred administration fees paid by each Fund to Service
Organizations was as follows:
Dec. 1996
---------
Prime Obligations Fund
Money Market Fund
Treasury Obligations Fund
Government Fund
Tax Free Fund
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by the Trust in connection with the investment of fiduciary
funds in FST Preferred Shares. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in FST Preferred Shares. In addition, under some
state securities laws, banks and other financial institutions purchasing FST
Preferred Shares on behalf of their customers may be required to register as
dealers.
48
<PAGE>
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 such Plan or the related Service Agreements, initially voted to
approve the Plan and Service Agreements at a meeting called for the purpose of
voting on such Plan and Service Agreements on April 23, 1997. The Plan and
Service Agreements 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. The Plan may
not be amended to increase materially the amount to be spent for the services
described therein without approval of the FST Preferred Shareholders of the
Funds, and all material amendments of the Plan must also be approved by the
Board of Trustees in the manner described above. The Plan may be terminated at
any time by a majority of the Board of Trustees as described above or by vote of
a majority of the outstanding FST Preferred Shares of the Funds. The Service
Agreements may be terminated at any time, without payment of any penalty, by
vote of a majority of the Board of Trustees as described above or by a vote of a
majority of the outstanding FST Preferred Shares of the Funds on not more than
sixty (60) days' written notice to any other party to the Service Agreements.
The Service Agreements shall terminate automatically if assigned. As long as
the Plan is in effect, the selection and nomination of those Trustees who are
not interested persons shall be committed to the discretion of the Trust's
Nominating Committee, which consists of all of the non-interested members of the
Board of Trustees. The Board of Trustees has determined that, in its judgment,
there is a reasonable likelihood that the Plan will benefit the Funds and
holders of FST Preferred Shares of the Funds. In the Board of Trustees' quar
terly review of the Plan and Service Agreements, the Board will consider their
continued appropriateness and the level of compensation provided therein.
49
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements
Not Applicable.
(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) or to Post-
Effective Amendment No. 26 to such Registration Statement (Accession No.
0000950130-95-002856).
1(a). Amendment No. 2 to the Agreement and Declaration of Trust of the
Registrant. (Reference B)
1(b). Amendment to the Agreement and Declaration of Trust of the
Registrant. (Reference G)
1(c). Amended and Restated Agreement and Declaration of Trust. (Reference
I).
1(d). Amendment to the Amended and Restated Declaration of Trust of the
Registrant dated August 19, 1992. (Reference K)
1(e). Amendment to Amended and Restated Agreement and Declaration of
Trust. (Reference L)
1(f). Amendment to the Amended and Restated Agreement and Declaration of
Trust (Reference S)
<PAGE>
2. By-laws of the Registrant. (Reference B)
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 Goldman Sachs
Global Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(c). Subadvisory Agreement between Registrant on behalf of Goldman Sachs
Global Income Fund and Goldman Sachs Asset Management
International Limited. (Reference P)
5(d). Advisory Agreement between Registrant on behalf of GS Adjustable
Rate Government Agency Fund and Goldman Sachs Asset Management.
(Reference P)
5(e). Advisory Agreement between Registrant on behalf of GS Short Duration
Tax-Free Fund and Goldman, Sachs & Co. (Reference P)
5(g). Advisory Agreement between Registrant on behalf of Goldman Sachs
Government Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(i). Advisory Agreement between Registrant on behalf of Goldman Sachs
Municipal Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(h). Administration Agreement between the Registrant on behalf of Goldman
Sachs Municipal Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(k). Administration Agreement between Registrant on behalf of Goldman
Sachs Global Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(m). Administration Agreement between Registrant on behalf of Goldman
Sachs Government Income Fund and Goldman Sachs Asset Management.
(Reference P)
5(n). Advisory Agreement between Registrant on behalf of GS Core Fixed
Income Fund and Goldman Sachs Asset Management. (Reference T)
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)
2
<PAGE>
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)
10. Opinion of Counsel (filed with 24f-2)
13. Subscription Agreement with Goldman, Sachs & Co. (Reference B)
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)
17(a). Transfer Agency Agreement between Registrant and Goldman, Sachs &
Co. (Reference P)
17(b). Fee schedule relating to the Transfer Agency Agreement between
Registrant and Goldman, Sachs & Co. (Reference B)
17(c). Power of Attorney of Ms. Beck. (Reference N)
3
<PAGE>
17(d). Powers of Attorney of Messrs. Armellino, Bakhru, Mayo, Nagel,
Shuch, Smart, Springer, Strubel, Gilman, Hopkins, Mosior,
Richman, Mmes. Mucker and Taylor. (Reference O)
17(e). Power of Attorney Messr. Ford. (Reference W)
18. Form of Plan entered into by Registrant pursuant to Rule 18f-3
(Reference Z).
The following exhibits relating to Goldman Sachs Trust (the Delaware business
trust)are filed herewith electronically pursu ant to EDGAR rules:
1. Agreement and Declaration of Trust.
2. By-Laws
5. Form of Management Agreement
4
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
-------------------------------------------------------------
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
-------------------------------
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
- -------------- --------------
<S> <C>
GS Short Duration Government Fund
Institutional Shares 340
Administration Shares 21
Service Shares 1
Class A 0
Class B 0
GS Adjustable Rate Government Fund
Institutional Shares 466
Administration Shares 17
Service Shares 0
Class A Shares 365
GS Short Duration Tax-Free Fund
Institutional Shares 147
Administration Shares 3
Service Shares 0
Class A 0
Class B 0
GS Core Fixed Income Fund
Institutional Shares 144
Administration Shares 19
Service Shares 1
Class A 0
Class B 0
Goldman Sachs Global Income Fund
Institutional Shares 34
Service Shares 4
Class A Shares 2,493
Class B Shares 42
Goldman Sachs Government Income Fund
Class A Shares 728
Class B Shares 35
Goldman Sachs Municipal Income Fund
Class A Shares 1,533
Class B Shares 19
Treasury Obligations Portfolio
ILA Units 731
ILA Administration Units 61
ILA Service Units 6
Treasury Instruments Portfolio
ILA Units 565
ILA Administration Units 50
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
ILA Service Units 14
Federal Portfolio
ILA Units 2288
ILA Administration Units 640
ILA Service Units 182
Government Portfolio
ILA Units 1294
ILA Administration Units 59
ILA Service Units 10
Prime Obligations Portfolio
ILA Units 876
ILA Administration Units 60
ILA Service Units 17
ILA Class B Units 393
Money Market Portfolio
ILA Units 1343
ILA Administration Units 793
ILA Service Units 6
Tax-Exempt Diversified Portfolio
ILA Units 2032
ILA Administration Units 25
ILA Service Units 21
Tax-Exempt California Portfolio
ILA Units 817
ILA Administration Units 2
ILA Service Units 0
Tax-Exempt New York Portfolio
ILA Units 201
ILA Administration Units 51
ILA Service Units 0
Financial Square Treasury Obligations Fund
FST Shares 276
FST Administration Shares 82
FST Service Shares 584
FST Preferred Shares 21
Financial Square Prime Obligations Fund
FST Shares 434
FST Administration Shares 108
FST Service Shares 377
FST Preferred Shares 5
Financial Square Government Fund
FST Shares 198
FST Administration Shares 143
FST Service Shares 66
FST Preferred Shares 4
Financial Square Money Market Fund
FST Shares 443
FST Administration Shares 143
FST Service Shares 107
FST Preferred Shares 9
Financial Square Tax-Free Money Market Fund
FST Shares 188
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
FST Administration Shares 39
FST Service Shares 68
FST Preferred Shares 1
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
Financial Square Treasury Instruments Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
Financial Square Federal Fund
FST Shares 0
FST Administration Shares 0
FST Service Shares 0
FST Preferred Shares 0
Goldman Sachs Capital Growth Fund Shares
Class A 30,379
Class B 274
Goldman Sachs CORE U.S. Equity Fund Shares
Class A 10,529
Class B 891
Institutional Class 22
Goldman Sachs Small Cap Equity Fund Shares
Class A 16,348
Class B 353
Goldman Sachs International Equity Fund Shares
Class A 21,790
Class B 1,653
Institutional Class 35
Service Class 4
Goldman Sachs Growth and Income Fund Shares
Class A 30,593
Class B 1,035
Institutional Class 7
Service Class 5
Goldman Sachs Asia Growth Fund Shares
Class A 11,500
Class B 346
Institutional Class 18
Service Class 4
Goldman Sachs Balanced Fund Shares
Class A 3,323
Class B 139
Goldman Sachs Mid-Cap Equity Fund
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Institutional Shares 17
Service Shares 4
Goldman Sachs CORE Large Cap Growth Fund
Class A 0
Class B 0
Institutional 0
Service 0
Goldman Sachs Growth Fund
Class A 0
Class B 0
Institutional 0
Service 0
Goldman Sachs Emerging Markets Equity Fund
Class A 0
Class B 0
Institutional 0
Service 0
</TABLE>
(Information supplied as of January 31, 1997)
ITEM 27. INDEMNIFICATION
---------------
Article VI of the Registrant's Amended and Restated Agreement and Declaration of
Trust provides for indemnification of the Registrant's trustees and officers
under certain circumstances. A copy of each Amended and Restated Agreement and
Declaration of Trust is filed as Exhibit 1(f) in Post Effective Amendment No. 7
(Reference I).
Paragraph 7 of the Advisory Agreement dated March 28, 1988 between the
Registrant on behalf of GS Short-Term Government Agency Fund and Goldman, Sachs
& Co., paragraph 7 of the Advisory Agreement dated as of July 15, 1991 between
the Registrant on behalf of Goldman Sachs Global Income Fund and Goldman Sachs
Asset Management, paragraph 7 of the Advisory Agreement dated as of July 15,
1991 between GS Adjustable Rate Government Agency Fund and Goldman Sachs Asset
Management, and paragraph 7 of the Advisory Agreement dated September 25, 1992
between the Regis trant on behalf of GS Short Duration Tax-Free Fund and Goldman
Sachs & Co., paragraph 7 of the Advisory Agreement dated Novem ber 23, 1993
between the Registrant on behalf of GS Government Agency Portfolio and Goldman,
Sachs & Co., paragraph 7 of the Advisory Agreement dated February 1, 1993
between the Registrant on behalf of each of GS Adjustable Rate Mortgage Fund and
Goldman Sachs Government Income Fund and Goldman Sachs Asset Management, and
paragraph 7 of the Advisory Agreement dated July 16, 1993 be tween the
Registrant on behalf of Goldman Sachs Municipal Income Fund and Goldman Sachs
Asset Management and paragraph 7 of the Advisory Agreement between the
Registrant on behalf of GS Core Fixed Income Fund and Goldman Sachs Asset
Management and para graph 7 of the Advisory Agreement dated October 27, 1993
between the registrant on behalf of each of Goldman Sachs California
8
<PAGE>
Municipal Income Fund and Goldman Sachs New York Municipal Income Fund and
Goldman Sachs Asset Management, provide for indemnifi cation of Goldman, Sachs &
Co., Goldman Sachs Asset Management or, in lieu thereof, contribution by the
Registrant under certain circumstances. Copies of such Agreements were filed as
Exhibits 5(a), (b), (d), (e), (f), (g), (h), (i), (n), (o), and (p),
respectively, to Registrant's Registration Statement.
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 is filed
as Exhibit 1(a).
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 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 are filed as Exhibits 5(a), 5(b)and 5(c).
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
9
<PAGE>
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 Goldman Money
Market Trust, Trust for Credit Unions and for shares of Goldman Sachs Trust and
Goldman Sachs Equity Portfolios, Inc. 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. None
of the members of the executive committee holds a position or office with the
Registrant.
GOLDMAN SACHS MANAGING DIRECTORS
<TABLE>
<CAPTION>
Name and Principal
Business Address Position
---------------- --------
<S> <C>
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
</TABLE>
_______________________
(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 Amended and Restated Agreement and Declaration of Trust, By-laws and minute
books of the Registrant 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 maintained under Section 31(a) of the
Investment Company Act of 1940 and the Rule promulgated there under are in the
physical possession of State Street Bank and Trust Company, P.O. Box 1713,
Boston, Massachusetts 02105 except for certain transfer agency records which are
maintained by Goldman, Sachs & Co., 4900 Sears Tower, Chicago, Illinois 60606.
10
<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 respect to Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs
Growth Fund, Goldman Sachs Emerging Markets Equity Fund, Financial Square
Treasury Instruments Fund and Financial Square Federal 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 Registrant's Registration
Statement relating to shares of such Fund.
11
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 29 to its Registration Statement to be signed on its behalf by the
undersigned, thereun to duly authorized, in the City and State of New York on
the 12th day of February, 1997.
GOLDMAN SACHS 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. 29 to the Registration Statement 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 and Trustee February 12, 1997
- ------------------------
Douglas C. Grip
*Scott M. Gilman Principal Accounting February 12, 1997
- ------------------------
Scott M. Gilman Officer And Principal
Financial Officer
*David B. Ford Trustee February 12, 1997
- ------------------------
David B. Ford
*Ashok N. Bakhru Trustee February 12, 1997
- ------------------------
Ashok N. Bakhru
*Alan A. Shuch Trustee February 12, 1997
- ------------------------
Alan A. Shuch
*Jackson W. Smart Trustee February 12, 1997
- ------------------------
Jackson W. Smart, Jr.
*William H. Springer Trustee February 12, 1997
- ------------------------
William H. Springer
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Richard P. Strubel Trustee February 12, 1997
- ---------------------
Richard P. Strubel
*By: /s/ Michael J. Richman February 12, 1997
----------------------
Michael J. Richman,
Attorney-In-Fact
</TABLE>
* Pursuant to a power of attorney previously filed.
13
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
- -------
1. Agreement and Declaration of Trust.
2. By-Laws
5. Form of Management Agreement
16
<PAGE>
EXHIBIT 1
DECLARATION OF TRUST
OF
GOLDMAN SACHS TRUST
4900 Sears Tower
Chicago, Illinois 60606
Dated January 28, 1997
AGREEMENT AND DECLARATION OF TRUST made this 28th day of January, 1997 by
the undersigned trustees (together with all other persons from time to time duly
elected, qualified and serving as Trustees in accordance with the provisions of
Article II hereof, the "Trustees");
WHEREAS, the Trustees desire to establish a trust for the investment and
reinvestment of funds contributed thereto;
WHEREAS, the Trustees desire that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest, as
hereinafter provided;
WHEREAS, the Trustees declare that all money and property contributed to
the trust established hereunder shall be held and managed in trust for the
benefit of the holders, from time to time, of the shares of beneficial interest
issued hereunder and subject to the provisions hereof;
NOW, THEREFORE, in consideration of the foregoing premises and the
agreements contained herein, the undersigned, being all of the Trustees of the
Trust, hereby declare as follows:
ARTICLE I
---------
NAME AND DEFINITIONS
--------------------
Section 1. Name. The name of the Trust created by this Agreement and
----
Declaration of Trust is "Goldman Sachs Trust."
Section 2. Definitions. Unless otherwise provided or required by the
-----------
context:
(a) "Administrator" means the party, other than the Trust, to the contract
-------------
described in Article III, Section 3 hereof.
(b) "By-laws" means the By-laws of the Trust adopted by the Trustees, as
-------
amended from time to time, which By-laws are expressly herein incorporated by
reference as part of the "governing instrument" within the meaning of the
Delaware Act.; provided that in the event of a conflict between the provisions
of this Declaration and the By-laws, the provisions of this Declaration shall
control.
(c) "Class" means the class of Shares of a Series established pursuant to
-----
Article V.
(d) "Commission," "Interested Person" and "Principal Underwriter" have the
---------- ----------------- ---------------------
meanings provided in the 1940 Act. Except as such term may be otherwise defined
by the Trustees in conjunction with the establishment of any Series of Shares,
the term "vote of a majority of the Shares outstanding and entitled to vote" or
------------------------------------------------------------ ----
"Shares representing a majority of the votes entitled to be cast" shall have the
----------------------------------------------------------------
same meaning as is assigned to the term "vote of a majority of the outstanding
-------------------------------------
voting securities" in the 1940 Act (except as shall be necessary to give effect
- -----------------
to voting on a net asset basis in accordance with Article VII, Section 1).
1
<PAGE>
(e) "Covered Person" means a person so defined in Article IV, Section 3.
--------------
(f) "Custodian" means any Person other than the Trust who has custody of
---------
any Trust Property as required by Section 17(f) of the 1940 Act, but does not
include a system for the central handling of securities described in said
Section 17(f).
(g) "Declaration" shall mean this Agreement and Declaration of Trust, as
-----------
amended or restated from time to time. Reference in this Declaration of Trust
to "Declaration," "hereof," "herein," and "hereunder" shall be deemed to refer
to this Declaration rather than exclusively to the article or section in which
such words appear.
(h) "Delaware Act" means Chapter 38 of Title 12 of the Delaware Code
------------
entitled "Treatment of Delaware Business Trusts," as amended from time to time.
(i) "Distributor" means the party, other than the Trust, to the contract
-----------
described in Article III, Section 1 hereof.
(j) "His" shall include the feminine and neuter, as well as the masculine,
---
genders.
(k) "Investment Adviser" means the party, other than the Trust, to the
------------------
contract described in Article III, Section 2 hereof.
(l) "Net Asset Value" means the net asset value of each Series of the
---------------
Trust, determined as provided in Article VI, Section 3.
(m) "Person" means and includes individuals, corporations, partnerships,
------
trusts, associations, joint ventures, estates and other entities, and
governments and agencies and political subdivisions, thereof, whether domestic
or foreign.
(n) "Series" means a series of Shares established pursuant to Article V.
------
(o) "Shareholder" means a record owner of Outstanding Shares.
-----------
(p) "Shares" means the equal proportionate transferable units of interest
------
into which the beneficial interest of each Series or Class is divided from time
to time (including whole Shares and fractions of Shares). "Outstanding Shares"
means Shares shown in the books of the Trust or its transfer agent as then
issued and outstanding, but does not include Shares which have been repurchased
or redeemed by the Trust and which are held in the treasury of the Trust.
(q) "Transfer Agent" means any Person other than the Trust who maintains
--------------
the Shareholder records of the Trust, such as the list of Shareholders, the
number of Shares credited to each account, and the like.
(r) "Trust" means Goldman Sachs Trust established hereby, and reference to
-----
the Trust, when applicable to one or more Series, refers to that Series.
(s) "Trustees" means the persons who have signed this Declaration of Trust,
--------
so long as they shall continue in office in accordance with the terms hereof,
and all other persons who may from time to time be duly qualified and serving as
Trustees in accordance with Article II, in all cases in their capacities as
Trustees hereunder.
(t) "Trust Property" means any and all property, real or personal, tangible
--------------
or intangible, which is owned or held by or for the Trust or any Series or the
Trustees on behalf of the Trust or any Series.
2
<PAGE>
(u) The "1940 Act" means the Investment Company Act of 1940, as amended
--------
from time to time.
ARTICLE II
----------
THE TRUSTEES
------------
Section 1. Management of the Trust. The business and affairs of the Trust
-----------------------
shall be managed by or under the direction of the Trustees, and they shall have
all powers necessary or desirable to carry out that responsibility. The
Trustees may execute all instruments and take all action they deem necessary or
desirable to promote the interests of the Trust. Any determination made by the
Trustees in good faith as to what is in the interests of the Trust shall be
conclusive. In construing the provisions of this Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
Section 2. Powers. The Trustees in all instances shall act as principals,
------
free of the control of the Shareholders. The Trustees shall have full power and
authority to take or refrain from taking any action and to execute any contracts
and instruments that they may consider necessary or desirable in the management
of the Trust. The Trustees shall not in any way be bound or limited by current
or future laws or customs applicable to trust investments, but shall have full
power and authority to make any investments which they, in their sole
discretion, deem proper to accomplish the purposes of the Trust. The Trustees
may exercise all of their powers without recourse to any court or other
authority. Subject to any applicable limitation herein or in the By-laws or
resolutions of the Trust, the Trustees shall have power and authority, without
limitation:
(a) To operate as and carry on the business of an investment company, and
exercise all the powers necessary and appropriate to the conduct of such
operations.
(b) To invest in, hold for investment, or reinvest in, cash, including
foreign currencies; securities, including common, preferred and preference
stocks; warrants; subscription rights; profit- sharing interests or
participation and all other contracts for or evidence of equity interests;
bonds, debentures, bills, time notes and all other evidences of indebtedness;
negotiable or non-negotiable instruments; government securities, including
securities of any state, municipality or other political subdivision thereof, or
any governmental or quasi-governmental agency or instrumentality; and money
market instruments including bank certificates of deposit, finance paper,
commercial paper, bankers' acceptances and all kinds of repurchase agreements,
of any corporation, company, trust, association, firm or other business
organization however established, and of any country, state, municipality or
other political subdivision, or any governmental or quasi-governmental agency or
instrumentality; or any other security, property or instrument in which the
Trust or any of its Series shall be authorized to invest.
(c) To acquire (by purchase, subscription or otherwise), to hold, to trade
in and deal in, to acquire any rights or options to purchase or sell, to sell or
otherwise dispose of, to lend and to pledge any such securities, to enter into
repurchase agreements, reverse repurchase agreements, firm commitment agreements
and forward foreign currency exchange contracts, to purchase and sell options on
securities, securities indices, currency and other financial assets, futures
contracts and options on futures contracts of all descriptions and to engage in
all other types of transactions in which the Trust or any of its Series shall
be authorized to engage.
(d) To exercise all rights, powers and privileges of ownership or interest
in all securities, repurchase agreements and other property and instruments
included in the Trust Property, including the right to vote thereon and
otherwise act with respect thereto and to do all acts for the preservation,
protection, improvement and enhancement in value of all such securities and
repurchase agreements.
(e) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop and dispose of (by sale or otherwise) any property, real or
personal, including cash or foreign currency, and any interest
3
<PAGE>
therein.
(f) To borrow money or other property in the name of the Trust or any of
its Series exclusively for Trust purposes and in this connection issue notes or
other evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; and to endorse, guarantee,
or undertake the performance of any obligation or engagement of any other Person
and to lend Trust Property.
(g) To aid by further investment any corporation, company, trust,
association or firm, any obligation of or interest in which is included in the
Trust Property or in the affairs of which the Trustees have any direct or
indirect interest; to do all acts and things designed to protect, preserve,
improve or enhance the value of such obligation or interest; and to guarantee or
become surety on any or all of the contracts, stocks, bonds, notes, debentures
and other obligations of any such corporation, company, trust, association or
firm.
(h) To adopt By-laws not inconsistent with this Declaration providing for
the conduct of the business of the Trust and to amend and repeal them to the
extent such right is not reserved to the Shareholders.
(i) To elect and remove such officers and appoint and terminate such agents
as they deem appropriate.
(j) To employ as custodian of any assets of the Trust, subject to any
provisions herein or in the By-laws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such.
(k) To retain one or more transfer agents and shareholder servicing agents,
or both.
(l) To provide for the distribution of Shares either through a Principal
Underwriter as provided herein or by the Trust itself, or both, or pursuant to a
distribution plan of any kind and to adopt on behalf of any Series or Class
distribution, authorized dealer service, administration, service or other plans
providing for the compensation by such Series or Class for distribution,
administration, shareholder liaison or similar services.
(m) To set record dates in the manner provided for herein or in the By-
laws.
(n) To delegate such authority as they consider desirable to any officers
of the Trust and to any agent, independent contractor, manager, investment
adviser, custodian or underwriter.
(o) To hold any security or other property (i) in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form, or
(ii) either in the Trust's or Trustees' own name or in the name of a custodian
or a nominee or nominees, subject to safeguards according to the usual practice
of business trusts or investment companies.
(p) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes, and with
separate Shares representing beneficial interests in such Series, and to
establish separate Classes, all in accordance with the provisions of Article V.
(q) To the full extent permitted by Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series
and assets, liabilities and expenses to a particular Class or to apportion the
same between or among two or more Series or Classes, provided that any
liabilities or expenses incurred by a particular Series or Class shall be
payable solely out of the assets belonging to that Series or Class as provided
for in Article V, Section 4.
4
<PAGE>
(r) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern whose securities are held
by the Trust; to consent to any contract, lease, mortgage, purchase, or sale of
property by such corporation or concern; and to pay calls or subscriptions with
respect to any security held in the Trust.
(s) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes.
(t) To make distributions of income, capital gains, returns of capital (if
any) and redemption proceeds to Shareholders in the manner hereinafter provided
for.
(u) To establish committees for such purposes, with such membership, and
with such responsibilities as the Trustees may consider proper.
(v) To issue, sell, repurchase, redeem, cancel, retire, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares; to establish terms and
conditions regarding the issuance, sale, repurchase, redemption, cancellation,
retirement, acquisition, holding, resale, reissuance, disposition of or dealing
in Shares; and, subject to Articles V and VI, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any funds or
property of the Trust or of the particular Series with respect to which such
Shares are issued.
(w) To invest part or all of the Trust Property (or part or all of the
assets of any Series), or to dispose of part or all of the Trust Property (or
part or all of the assets of any Series) and invest the proceeds of such
disposition, in securities issued by one or more other investment companies
registered under the 1940 Act (including investment by means of transfer of part
or all of the Trust Property in exchange for an interest or interests in such
one or more investment companies) all without any requirement of approval by
Shareholders. Any such other investment company may (but need not) be a trust
(formed under the laws of the State of New York or of any other state) which is
classified as a partnership for federal income tax purposes.
(x) To sell or exchange any or all of the assets of the Trust, subject to
Article IX, Section 4.
(y) To enter into joint ventures, partnerships and other combinations and
associations.
(z) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such Committee, depositary or trustee as the Trustees shall deem
proper;
(aa) To purchase and pay for entirely out of Trust Property such insurance
as the Trustees may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust or payment of distributions and principal on its portfolio
investments, and, subject to applicable law and any restrictions set forth in
the By-laws, insurance policies insuring the Shareholders, Trustees, officers,
employees, agents, investment advisers, Principal Underwriters, or independent
contractors of the Trust, individually, against all claims and liabilities of
every nature arising by reason of holding Shares, holding, being or having held
any such office or position, or by reason of any action alleged to have been
taken or omitted by any such Person as Trustee, officer, employee, agent,
investment adviser, Principal Underwriter, or independent contractor, including
any action taken or omitted that may be determined to constitute negligence,
whether or not the Trust would have the power to indemnify such Person against
liability;
5
<PAGE>
(bb) To adopt, establish and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans and trusts, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust;
(cc) To enter into contracts of any kind and description;
(dd) To interpret the investment policies, practices or limitations of any
Series or Class;
(ee) To guarantee indebtedness and contractual obligations of others;
(ff) To take any other action that may be taken by a Board of Directors of
a business corporation organized under the laws of the State of Delaware; and
(gg) To carry on any other business in connection with or incidental to any
of the foregoing powers, to do everything necessary or desirable to accomplish
any purpose or to further any of the foregoing powers, and to take every other
action incidental to the foregoing business or purposes, objects or powers.
The clauses above shall be construed as objects and powers, and the
enumeration of specific powers shall not limit in any way the general powers of
the Trustees. Any action by one or more of the Trustees in their capacity as
such hereunder shall be deemed an action on behalf of the Trust or the
applicable Series, and not an action in an individual capacity. No one dealing
with the Trustees shall be under any obligation to make any inquiry concerning
the authority of the Trustees, or to see to the application of any payments made
or property transferred to the Trustees or upon their order. In construing this
Declaration, the presumption shall be in favor of a grant of power to the
Trustees.
Section 3. Certain Transactions. Except as prohibited by applicable law,
--------------------
the Trustees may, on behalf of the Trust, buy any securities from or sell any
securities to, or lend any assets of the Trust to, any Trustee or officer of the
Trust or any firm of which any such Trustee or officer is a member acting as
principal, or have any such dealings with any investment adviser, administrator,
distributor or transfer agent for the Trust or with any Interested Person of
such person. The Trust may employ any such person or entity in which such
person is an Interested Person, as broker, legal counsel, registrar, investment
adviser, administrator, distributor, transfer agent, dividend disbursing agent,
custodian or in any other capacity upon customary terms.
Section 4. Initial Trustees; Election and Number of Trustees. The initial
-------------------------------------------------
Trustees shall be the persons initially signing this Declaration. The number of
Trustees (other than the initial Trustees) shall be fixed from time to time by a
majority of the Trustees; provided, that there shall be at least one (1) Trustee
and no more than fifteen (15). The Trustee (other than the initial Trustees)
shall be appointed by the Trustees pursuant to Section 6 of this Article II,
provided that the Trustees shall be elected by the Shareholders as and to the
extent required under the 1940 Act on such dates as the Trustees may fix from
time to time.
Section 5. Term of Office of Trustees. Each Trustee shall hold office for
--------------------------
life (or until the attainment of any mandatory retirement age or term limits
established by a majority of the Trustees) or until his successor is elected or
the Trust terminates; except that (a) any Trustee may resign by delivering to
the other Trustees or to any Trust officer a written resignation effective upon
such delivery or a later date specified therein; (b) any Trustee may be removed
with or without cause at any time by a written instrument signed by at least a
majority of the then Trustees, specifying the effective date of removal; (c) any
Trustee who requests to be retired, or who is declared bankrupt or has become
physically or mentally incapacitated or is otherwise unable to serve, may be
retired by a written instrument signed by a majority of the other Trustees,
specifying the effective date of retirement; and (d) any Trustee may be removed
at any meeting of the Shareholders by a
6
<PAGE>
vote of at least two-thirds of the Outstanding Shares.
Section 6. Vacancies; Appointment of Trustees. Whenever a vacancy shall
----------------------------------
exist in the Board of Trustees, regardless of the reason for such vacancy, the
remaining Trustees shall appoint any person as they determine in their sole
discretion to fill that vacancy, consistent with the limitations under the 1940
Act. Such appointment shall be made by a written instrument signed by a
majority of the Trustees or by a resolution of the Trustees, duly adopted and
recorded in the records of the Trust, specifying the effective date of the
appointment. The Trustees may appoint a new Trustee as provided above in
anticipation of a vacancy expected to occur because of the retirement,
resignation or removal of a Trustee, or an increase in number of Trustees,
provided that such appointment shall become effective only at or after the
expected vacancy occurs. As soon as any such Trustee has accepted his
appointment in writing, the trust estate shall vest in the new Trustee, together
with the continuing Trustees, without any further act or conveyance, and he
shall be deemed a Trustee hereunder. The Trustees' power of appointment is
subject to Section 16(a) of the 1940 Act. Whenever a vacancy in the number of
Trustees shall occur, until such vacancy is filled as provided in this Article
II, the Trustees in office, regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by the Declaration.
Section 7. Temporary Vacancy or Absence. Whenever a vacancy in the Board
----------------------------
of Trustees shall occur, until such vacancy is filled, or while any Trustee is
absent from his domicile (unless that Trustee has made arrangements to be
informed about, and to participate in, the affairs of the Trust during such
absence), or is physically or mentally incapacitated, the remaining Trustees
shall have all the powers hereunder and their certificate as to such vacancy,
absence, or incapacity shall be conclusive. Any Trustee may, by power of
attorney, delegate his powers as Trustee for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees.
Section 8. Chairman. The Trustees shall appoint one of their number to be
--------
Chairman of the Board of Trustees. The Chairman shall preside at all meetings
of the Trustees, shall be responsible for the execution of policies established
by the Trustees and the administration of the Trust, and may be the chief
executive, financial and/or accounting officer of the Trust.
Section 9. Action by the Trustees. Except as provided below with respect
----------------------
to action taken by any Trustee or Trustees or committee pursuant to delegation
by a majority vote of the Trustees, the Trustees shall act by majority vote at a
meeting duly called at which a quorum is present, including a meeting held by
conference telephone, teleconference or other electronic media or communication
equipment by means of which all persons participating in the meeting can
communicate with each other; or by written consent of a majority of Trustees (or
such greater number as may be required by applicable law) without a meeting. A
majority of the Trustees shall constitute a quorum at any meeting. Meetings of
the Trustees may be called orally or in writing by the President or by any one
of the Trustees. Notice of the time, date and place of all Trustees' meetings
shall be given to each Trustee as set forth in the By-laws; provided, however,
that no notice is required if the Trustees provide for regular or stated
meetings. Notice need not be given to any Trustee who attends the meeting
without objecting to the lack of notice or who signs a waiver of notice either
before or after the meeting. Subject to applicable law, the Trustees by majority
vote may delegate to any Trustee or Trustees or committee (which may, in
addition to or in lieu of Trustees, include officers of the Trust) authority to
approve particular matters or take any particular actions on behalf of the Trust
including action for and binding upon the Trustees and the Trust with respect to
the institution, prosecution, dismissal, settlement, review or investigation of
any legal action, suit or proceeding pending or threatened. Approval of any
particular matter or the taking of any particular action on behalf of the Trust
pursuant to any such delegation shall be taken by a majority of the Trustees or
committee to whom the authority is delegated (unless a single Trustee is
delegated to act with respect thereto or unless the Trustees in delegating such
responsibility shall specify a different standard or a different standard is
otherwise required by applicable law). Any written consent or waiver may be
provided and delivered to the Trust by facsimile or other similar electronic
mechanism.
7
<PAGE>
Section 10. Ownership of Trust Property. The Trust Property of the Trust
---------------------------
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. Legal title in and beneficial ownership of all of
the assets of the Trust shall at all times be considered as vested in the Trust,
except that the Trustees may cause legal title in and beneficial ownership of
any Trust Property to be held by, or in the name of one or more of the Trustees
acting for and on behalf of the Trust, or in the name of any person as nominee
acting for and on behalf of the Trust. No Shareholder shall be deemed to have a
severable ownership in any individual asset of the Trust or of any Series or any
right of partition or possession thereof, but each Shareholder shall have, as
provided in Article V, a proportionate undivided beneficial interest in the
Trust or Series or Class thereof represented by Shares. The Shares shall be
personal property giving only the rights specifically set forth in this Trust
Instrument. The Trust, or at the determination of the Trustees one or more of
the Trustees or a nominee acting for and on behalf of the Trust, shall be deemed
to hold legal title and beneficial ownership of any income earned on securities
of the Trust issued by any business entities formed, organized, or existing
under the laws of any jurisdiction, including the laws of any foreign country.
Upon the resignation or removal of a Trustee, or his otherwise ceasing to be a
Trustee (other than as a result of his death or incapacity), he shall execute
and deliver such documents as the remaining Trustees shall require for the
purpose of conveying to the Trust or the remaining Trustees any Trust Property
held in the name of the resigning or removed Trustee. Upon the incapacity or
death of any Trustee, his legal representative shall execute and deliver on his
behalf such documents as the remaining Trustees shall require as provided in the
preceding sentence.
Section 11. Effect of Trustees Not Serving. The death, resignation,
------------------------------
retirement, removal, incapacity or inability or refusal to serve of the
Trustees, or any one or more or all of them, shall not operate to annul the
Trust or to revoke any existing agency created pursuant to the terms of this
Declaration.
Section 12. Trustees, etc. as Shareholders. Subject to any restrictions
------------------------------
in the By-laws, any Trustee, officer, agent or independent contractor of the
Trust may acquire, own and dispose of Shares to the same extent as any other
Shareholder; the Trustees may issue and sell Shares to and buy Shares from any
such person or any firm or company in which such person is interested, subject
only to any general limitations herein.
Section 13. Series of Trustees. In connection with the establishment of
------------------
one or more Series or Classes, the Trustees establishing such Series or Class
may appoint, to the extent permitted by the Delaware Act, separate Trustees with
respect to such Series or Classes (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. To the extent provided by the Trustees in the appointment
of Series Trustees, the Series Trustees may have, to the exclusion of any other
Trustee of the Trust, all the powers and authorities of Trustees hereunder with
respect to such Series or Class, but may have no power or authority with respect
to any other Series or Class. Any provision of this Declaration relating to
election of Trustees by Shareholders only shall entitle the Shareholders of a
Series or Class for which Series Trustees have been appointed to vote with
respect to the election of such Series Trustees and the Shareholders of any
other Series or Class shall not be entitled to participate in such vote. In the
event that Series Trustees are appointed, the Trustees initially appointing such
Series Trustees shall, without the approval of any Outstanding Shares, amend
either the Declaration or the By-laws to provide for the respective
responsibilities of the Trustees and the Series Trustees in circumstances where
an action of the Trustees or Series Trustees affects all Series of the Trust or
two or more Series represented by different Trustees.
ARTICLE III
-----------
CONTRACTS WITH SERVICE PROVIDERS
--------------------------------
Section 1. Underwriting Contract. The Trustees may in their discretion
---------------------
from time to time enter
8
<PAGE>
into an exclusive or non-exclusive distribution contract or contracts providing
for the sale of the Shares whereby the Trustees may either agree to sell the
Shares to the other party to the contract or appoint such other party as their
sales agent for the Shares, and in either case on such terms and conditions, if
any, as may be prescribed in the By-laws, and such further terms and conditions
as the Trustees may in their discretion determine not inconsistent with the
provisions of this Article III or of the By-laws; and such contract may also
provide for the repurchase of the Shares by such other party as agent of the
Trustees.
Section 2. Advisory or Management Contract. The Trustees may in their
-------------------------------
discretion from time to time enter into one or more investment advisory or
management contracts or, if the Trustees establish multiple Series, separate
investment advisory or management contracts with respect to one or more Series
whereby the other party or parties to any such contracts shall undertake to
furnish the Trust or such Series management, investment advisory,
administration, accounting, legal, statistical and research facilities and
services, promotional or marketing activities, and such other facilities and
services, if any, as the Trustees shall from time to time consider desirable and
all upon such terms and conditions as the Trustees may in their discretion
determine. Notwithstanding any provisions of the Declaration, the Trustees may
authorize the Investment Advisers or persons to whom the Investment Adviser
delegates certain or all of their duties, or any of them, under any such
contracts (subject to such general or specific instructions as the Trustees may
from time to time adopt) to effect purchases, sales, loans or exchanges of
portfolio securities and other investments of the Trust on behalf of the
Trustees or may authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of such
Investment Advisers, or any of them (and all without further action by the
Trustees). Any such purchases, sales, loans and exchanges shall be deemed to
have been authorized by all of the Trustees.
Section 3. Administration Agreement. The Trustees may in their discretion
------------------------
from time to time enter into an administration agreement or, if the Trustees
establish multiple Series or Classes, separate administration agreements with
respect to each Series or Class, whereby the other party to such agreement shall
undertake to manage the business affairs of the Trust or of a Series or Class
thereof of the Trust and furnish the Trust or a Series or a Class thereof with
office facilities, and shall be responsible for the ordinary clerical,
bookkeeping and recordkeeping services at such office facilities, and other
facilities and services, if any, and all upon such terms and conditions as the
Trustees may in their discretion determine.
Section 4. Service Agreements. The Trustees may in their discretion from
------------------
time to time enter into service agreements with respect to one or more Series or
Classes of Shares whereby the other parties to such service agreements will
provide or arrange for the provision of distribution, administration and/or
support services pursuant to distribution, authorized dealer service,
administration, service or similar plans, and all upon such terms and conditions
as the Trustees in their discretion may determine.
Section 5. Transfer Agent. The Trustees may in their discretion from time
--------------
to time enter into a transfer agency and shareholder service contract whereby
the other party to such contract shall undertake to furnish transfer agency and
shareholder services to the Trust. The contract shall have such terms and
conditions as the Trustees may in their discretion determine not inconsistent
with the Declaration. Such services may be provided by one or more Persons.
Section 6. Custodian. The Trustees may appoint or otherwise engage one or
---------
more banks or trust companies, or any other entity satisfying the requirements
of the 1940 Act, to serve as Custodian with authority as its agent, but subject
to such restrictions, limitations and other requirements, if any, as may be
contained in the By-laws of the Trust. The Trustees may also authorize the
Custodian to employ one or more sub-custodians, including such foreign banks and
securities depositories as meet the requirements of applicable provisions of the
1940 Act, and upon such terms and conditions as may be agreed upon between the
Custodian and such sub-custodian, to hold securities and other assets of the
Trust and to perform the acts and services of the Custodian, subject to
applicable provisions of law and resolutions adopted by the Trustees.
Section 7. Affiliations of Trustees or Officers, Etc. The fact that:
-----------------------------------------
9
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(i) any of the Shareholders, Trustees or officers of the Trust or any
Series thereof is a shareholder, director, officer, partner, trustee,
employee, manager, adviser or distributor of or for any partnership,
corporation, trust, association or other organization or of or for any
parent or affiliate of any organization, with which a contract of the
character described in this Article III, for services as Custodian,
Transfer Agent, disbursing agent or for any other services approved by the
Trustees with respect to any Series or Class may have been or may hereafter
be made, or that any such organization, or any parent or affiliate thereof,
is a Shareholder of or has an interest in the Trust, or that
(ii) any partnership, corporation, trust, association or other
organization with which a contract of the character described in Sections
1, 2, 3 or 4 of this Article III or for services as Custodian, Transfer
Agent or disbursing agent or for any other services approved by the
Trustees with respect to any Series or Class may have been or may hereafter
be made also has any one or more of such contracts with one or more other
partnerships, corporations, trusts, associations or other organizations, or
has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same or create any liability or accountability to the Trust or its Shareholders.
ARTICLE IV
----------
COMPENSATION, LIMITATION OF LIABILITY AND INDEMNIFICATION
---------------------------------------------------------
Section 1. Compensation. The Trustees as such shall be entitled to
------------
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
Section 2. Limitation of Liability. All persons contracting with or
-----------------------
having any claim against the Trust or a particular Series shall look only to the
assets of all Series or such particular Series for payment under such contract
or claim; and neither the Trustees nor, when acting in such capacity, any of the
Trust's officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Every written instrument or obligation on behalf of
the Trust or any Series may contain a statement to the foregoing effect, but the
absence of such statement shall not operate to make any Trustee or officer of
the Trust liable thereunder. Provided they have exercised reasonable care and
have acted under the reasonable belief that their actions are in the best
interest of the Trust, the Trustees and officers of the Trust shall not be
responsible or liable for any act or omission or for neglect or wrongdoing of
them or any officer, agent, employee, investment adviser or independent
contractor of the Trust, but nothing contained in this Declaration or in the
Delaware Act shall protect any Trustee or officer of the Trust against liability
to the Trust or to Shareholders to which he 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 office.
Section 3. Indemnification. (a) Subject to the exceptions and limitations
---------------
contained in subsection (b) below:
(i) every person who is, or has been, a Trustee or an officer, employee or
agent of the Trust or any Series (including any individual who serves at
its request as director, officer, partner, trustee or the like of another
organization in which it has any interest as a shareholder, creditor or
otherwise) ("Covered Person") shall be indemnified by the Trust or the
appropriate Series to the fullest extent permitted by law against liability
and against all expenses reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which he becomes involved as
a party or
10
<PAGE>
otherwise by virtue of his being or having been a Covered Person and
against amounts paid or incurred by him in the settlement thereof; and
(ii) as used herein, the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil, criminal
or other, including appeals), actual or threatened, and the words
"liability" and "expenses" shall include, without limitation, reasonable
attorneys' fees, costs, judgments, amounts paid in settlement, fines,
penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which the
proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office, or (B) not
to have acted in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office; (A) by the court or other body approving the
settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type
inquiry); (C) by written opinion of independent legal counsel based upon a
review of readily available facts (as opposed to a full trial-type inquiry)
or (D) by a vote of a majority of the Outstanding Shares entitled to vote
(excluding any Outstanding Shares owned of record or beneficially by such
individual).
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person may now or hereafter be
entitled, and shall inure to the benefit of the heirs, executors and
administrators of a Covered Person.
(d) To the maximum extent permitted by applicable law, expenses in
connection with the preparation and presentation of a defense to any claim,
action, suit or proceeding of the character described in subsection (a) of this
Section may be paid by the Trust or applicable Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or on behalf of such
Covered Person that such amount will be paid over by him to the Trust or
applicable Series if it is ultimately determined that he is not entitled to
indemnification under this Section; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such undertaking,
(ii) the Trust is insured against losses arising out of any such advance
payments or (iii) either a majority of the Trustees who are neither Interested
Persons of the Trust nor parties to the matter, or independent legal counsel in
a written opinion, shall have determined, based upon a review of readily
available facts (as opposed to a full trial-type inquiry) that there is reason
to believe that such Covered Person will not be disqualified from
indemnification under this Section.
(e) Any repeal or modification of this Article IV by the Shareholders, or
adoption or modification of any other provision of the Declaration or By-laws
inconsistent with this Article, shall be prospective only, to the extent that
such repeal, or modification would, if applied retrospectively, adversely affect
any limitation on the liability of any Covered Person or indemnification
available to any Covered Person with respect to any act or omission which
occurred prior to such repeal, modification or adoption.
Section 3. Indemnification of Shareholders. If any Shareholder or former
-------------------------------
Shareholder of any Series shall be held personally liable solely by reason of
his being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his heirs,
executors, administrators or other legal representatives or in the case of any
entity, its general successor) shall be entitled out of the assets belonging to
the applicable Series to be held harmless from and indemnified against all loss
11
<PAGE>
and expense arising from such liability. The Trust, on behalf of the affected
Series, shall, 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.
Section 4. No Bond Required of Trustees. No Trustee shall be obligated to
----------------------------
give any bond or other security for the performance of any of his duties
hereunder.
Section 5. No Duty of Investigation; Notice in Trust Instruments, Etc. No
----------------------------------------------------------
purchaser, lender, transfer agent or other Person dealing with the Trustees or
any officer, employee or agent of the Trust or a Series thereof shall be bound
to make any inquiry concerning the validity of any transaction purporting to be
made by the Trustees or by said officer, employee or agent or be liable for the
application of money or property paid, loaned, or delivered to or on the order
of the Trustees or of said officer, employee or agent. Every obligation,
contract, instrument, certificate, Share, other security of the Trust or a
Series thereof or undertaking, and every other act or thing whatsoever executed
in connection with the Trust shall be conclusively presumed to have been
executed or done by the executors thereof only in their capacity as Trustees
under this Declaration or in their capacity as officers, employees or agents of
the Trust or a Series thereof. Every written obligation, contract, instrument,
certificate, Share, other security of the Trust or a Series thereof or
undertaking made or issued by the Trustees may recite that the same is executed
or made by them not individually, but as Trustees under the Declaration, and
that the obligations of the Trust or a Series thereof under any such instrument
are not binding upon any of the Trustees or Shareholders individually, but bind
only the Trust Property or the Trust Property of the applicable Series, and may
contain any further recital which they may deem appropriate, but the omission of
such recital shall not operate to bind the Trustees individually. The Trustees
may maintain insurance for the protection of the Trust Property or the Trust
Property of the applicable Series, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable and as required by the 1940 Act.
Section 6. Reliance on Experts, Etc. Each Trustee, officer or employee of
------------------------
the Trust or a Series thereof shall, in the performance of his duties, powers
and discretion hereunder be fully and completely justified and protected with
regard to any act or any failure to act resulting from reliance in good faith
upon the books of account or other records of the Trust or a Series thereof,
upon an opinion of counsel, or upon reports made to the Trust or a Series
thereof by any of its officers or employees or by the Investment Adviser, the
Administrator, the Distributor, Transfer Agent, selected dealers, accountants,
appraisers or other experts or consultants selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of whether such counsel
or expert may also be a Trustee.
ARTICLE V
---------
SERIES; CLASSES; SHARES
-----------------------
Section 1. Establishment of Series or Class. 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 35
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 U.S. 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 Market Equity Fund, Institutuional 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
12
<PAGE>
Instruments Portfolio, Institutional Liquid Assets-Tax-Exempt Diversified
Portfolio, 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 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 Shares:
Goldman Sachs Adjustable Rate Government 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 U.S. 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 Emerging Market Equity Fund Goldman Sachs
Asia Growth Fund.
Class B Shares
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
U.S. 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 Emerging
Market Equity Fund, Goldman Sachs Asia Growth Fund and
Institutional Liquid Assets Prime Obligations Portfolio.
Institutional Shares:
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 High Yield 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 Market 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 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.
Service Shares:
Goldman Sachs Adjustable Rate Government Fund, Goldman Sachs
Short Duration Government Fund, Goldman Sachs Short Duration Tax-
Free Fund, Goldman Sachs Core Fixed Income Fun, Goldman Sachs
Global Income Fund, Goldman Sachs High Yield 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 Market Equity Fund, Goldman
Sachs Asia Growth Fund, Financial Square Prime Obligations Fund,
Financial Square
13
<PAGE>
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.
Administration Shares:
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,
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 Shares:
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.
(the "Existing Classes"). The Shares of the Existing Series and each Class
thereof herein established and designated and any Shares of any further Series
and Classes that may from time to time be established and designated by the
Trustees shall be established and designated, and the variations in the relative
rights and preferences as between the different Series shall be fixed and
determined, by the Trustees; provided, that all Shares shall be identical except
for such variations as shall be fixed and determined between different Series or
Classes by the Trustees in establishing and designating such Class or Series. In
connection therewith with respect to the Existing Classes, the purchase price,
the method of determining the net asset value and allocating expenses, and the
relative dividend and voting rights of holders shall be as set forth in the
Trust's Registration Statement on Form N-1A under the Securities Act of 1933
and/or the 1940 Act, as amended from time to time.
All references to Shares in this Declaration shall be deemed to be Shares
of any or all Series or Classes as the context may require. The Trust shall
maintain separate and distinct records for each Series and hold and account for
the assets thereof separately from the other assets of the Trust or of any other
Series. A Series may issue any number of Shares or any Class thereof and need
not issue Shares. Each Share of a Series shall represent an equal beneficial
interest in the net assets of such Series. Each holder of Shares of a Series or
a Class thereof shall be entitled to receive his pro rata share of all
distributions made with respect to such Series or Class. Upon redemption of his
Shares, such Shareholder shall be paid solely out of the funds and
14
<PAGE>
property of such Series. The Trustees may adopt and change the name of any
Series or Class.
Section 2. Shares. The beneficial interest in the Trust shall be divided
------
into transferable Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of each Series and Class is
unlimited and each Share shall have no par value per Share or such other amount
as the Trustees may establish. All Shares issued hereunder shall be fully paid
and nonassessable. Shareholders shall have no preemptive or other right to
subscribe to any additional Shares or other securities issued by the Trust. The
Trustees shall have full power and authority, in their sole discretion and
without obtaining Shareholder approval, to issue original or additional Shares
at such times and on such terms and conditions as they deem appropriate; to
issue fractional Shares and Shares held in the treasury; to establish and to
change in any manner Shares of any Series or Classes with such preferences,
terms of conversion, voting powers, rights and privileges as the Trustees may
determine; to divide or combine the Shares of any Series or Classes into a
greater or lesser number; to classify or reclassify any unissued Shares of any
Series or Classes into one or more Series or Classes of Shares; to abolish any
one or more Series or Classes of Shares; to issue Shares to acquire other assets
(including assets subject to, and in connection with, the assumption of
liabilities) and businesses; and to take such other action with respect to the
Shares as the Trustees may deem desirable. Shares held in the treasury shall
not confer any voting rights on the Trustees and shall not be entitled to any
dividends or other distributions declared with respect to the Shares.
Section 3. Investment in the Trust. Subject to applicable law, the
-----------------------
Trustees shall accept investments in any Series or Class from such persons and
on such terms as they may from time to time authorize. Without limiting the
generality of the foregoing, at the Trustees' discretion, such investments may
be in the form of cash or securities in which that Series is authorized to
invest, valued as provided in Article VI, Section 3. The value of an investment
in a Class or a Series shall be credited to each Shareholder's account in the
form of full Shares at the Net Asset Value per Share next determined after the
investment is received or accepted as may be determined by the Trustees;
provided, however, that the Trustees may, in their sole discretion, (a) impose a
sales charge upon investments in any Series or Class, (b) issue fractional
Shares, (c) determine the Net Asset Value per Share of the initial capital
contribution or (d) authorize the issuance of Shares at a price other than Net
Asset Value to the extent permitted by the 1940 Act or any rule, order or
interpretation of the Commission thereunder. The Trustees shall have the right
to refuse to accept investments in any Series at any time without any cause or
reason therefor whatsoever.
Section 4. Assets and Liabilities of Series. All consideration received
--------------------------------
by the Trust for the issue or sale of Shares of a particular Series, together
with all assets in which such consideration is invested or reinvested, all
income, earnings, profits, and proceeds thereof (including any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may
be), shall be held and accounted for separately from the assets of every other
Series and are referred to as "assets belonging to" that Series. The assets
belonging to a Series shall belong only to that Series for all purposes, and to
no other Series, subject only to the rights of creditors of that Series. Any
assets, income, earnings, profits, and proceeds thereof, funds, or payments
which are not readily identifiable as belonging to any particular Series shall
be allocated by the Trustees between and among one or more Series as the
Trustees deem fair and equitable. Each such allocation shall be conclusive and
binding upon the Shareholders of all Series for all purposes, and such assets,
earnings, income, profits or funds, or payments and proceeds thereof shall be
referred to as assets belonging to that Series. The assets belonging to a
Series shall be so recorded upon the books of the Series, and shall be held by
the Trustees in trust for the benefit of the Shareholders of that Series. The
assets belonging to a Series or Class shall be charged with the liabilities of
that Series and all expenses, costs, charges and reserves attributable to that
Series, except that liabilities and expenses allocated solely to a particular
Class shall be borne by that Class. Any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as belonging
to any particular Series or Class shall be allocated and charged by the Trustees
between or among any one or more of the Series or Classes in such manner as the
Trustees deem fair and equitable. Each such allocation shall be conclusive and
binding upon the Shareholders of all Series or Classes for all purposes.
15
<PAGE>
Without limiting the foregoing, but subject to the right of the Trustees to
allocate general liabilities, expenses, costs, charges or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally, including the assets of any other Series. Notice of
this contractual limitation on liabilities among Series may, in the Trustees'
discretion, be set forth in the certificate of trust of the Trust (whether
originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the Delaware Act, and
upon the giving of such notice in the certificate of trust, the statutory
provisions of Section 3804 of the Delaware Act relating to limitations on
liabilities among Series (and the statutory effect under Section 3804 of setting
forth such notice in the certificate of trust) shall become applicable to the
Trust and each Series. Any person extending credit to, contracting with or
having any claim against any Series may look only to the assets of that Series
to satisfy or enforce any debt, with respect to that Series. No Shareholder or
former Shareholder of any Series shall have a claim on or any right to any
assets allocated or belonging to any other Series.
Section 5. Ownership and Transfer of Shares. The Trust or a transfer or
--------------------------------
similar agent for the Trust shall maintain a register containing the names and
addresses of the Shareholders of each Series and Class thereof, the number of
Shares of each Series and Class held by such Shareholders, and a record of all
Share transfers. The register shall be conclusive as to the identity of
Shareholders of record and the number of Shares held by them from time to time.
The Trustees may authorize the issuance of certificates representing Shares and
adopt rules governing their use. The Trustees may make rules governing the
transfer of Shares, whether or not represented by certificates. Except as
otherwise provided by the Trustees, Shares shall be transferable on the books of
the Trust only by the record holder thereof or by his duly authorized agent upon
delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer, together with a Share certificate if one is outstanding,
and such evidence or the genuineness of each such execution and authorization
and of such other matters as may be required by the Trustees. Upon such
delivery, and subject to any further requirements specified by the Trustees or
contained in the By-laws, the transfer shall be recorded on the books of the
Trust. Until a transfer is so recorded, the Shareholder of record of Shares
shall be deemed to be the holder of such Shares for all purposes hereunder and
neither the Trustees nor the Trust, nor any transfer agent or registrar or any
officer, employee or agent of the Trust, shall be affected by any notice of a
proposed transfer.
Section 6. Status of Shares; Limitation of Shareholder Liability. Shares
-----------------------------------------------------
shall be deemed to be personal property giving Shareholders only the rights
provided in this Declaration. Every Shareholder, by virtue of having acquired a
Share, shall be held expressly to have assented to and agreed to be bound by the
terms of this Declaration and to have become a party hereto. No Shareholder
shall be personally liable for the debts, liabilities, obligations and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
any Series. The death, incapacity, dissolution, termination or bankruptcy of a
Shareholder during the existence of the Trust shall not operate to terminate the
Trust, nor entitle the representative of any such Shareholder to an accounting
or to take any action in court or elsewhere against the Trust or the Trustees,
but entitles such representative only to the rights of such Shareholder under
this Trust. Ownership of Shares shall not entitle the Shareholder to any title
in or to the whole or any part of the Trust Property or right to call for a
partition or division of the same or for an accounting, nor shall the ownership
of Shares constitute the Shareholders as partners. Neither the Trust nor the
Trustees shall have any power to bind any Shareholder personally or to demand
payment from any Shareholder for anything, other than as agreed by the
Shareholder. Shareholders shall have the same limitation of personal liability
as is extended to shareholders of a private corporation for profit incorporated
in the State of Delaware. Every written obligation of the Trust or any Series
may contain a statement to the effect that such obligation may only be enforced
against the assets of the appropriate Series or all Series; however, the
omission of such statement shall not operate to bind or create personal
liability for any Shareholder or Trustee.
ARTICLE VI
----------
16
<PAGE>
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
Section 1. Distributions. The Trustees or a committee of one or more
-------------
Trustees and/or one or more officers may declare and pay dividends and other
distributions, including dividends on Shares of a particular Series and other
distributions from the assets belonging to that Series. No dividend or
distribution, including, without limitation, any distribution paid upon
termination of the Trust or of any Series (or Class) with respect to, nor any
redemption or repurchase of, the Shares of any Series (or Class) shall be
effected by the Trust other than from the assets held with respect to such
Series, nor shall any Shareholder of any particular Series otherwise have any
right or claim against the assets held with respect to any other Series except
to the extent that such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series. The Trustees shall have full discretion to
determine which items shall be treated as income and which items as capital; and
each such determination and allocation shall be conclusive and binding upon the
Shareholders. The amount and payment of dividends or distributions and their
form, whether they are in cash, Shares or other Trust Property, shall be
determined by the Trustees. Dividends and other distributions may be paid
pursuant to a standing resolution adopted once or more often as the Trustees
determine. All dividends and other distributions on Shares of a particular
Series shall be distributed pro rata to the Shareholders of that Series in
proportion to the number of Shares of that Series they held on the record date
established for such payment, except that such dividends and distributions shall
appropriately reflect expenses allocated to a particular Class of such Series.
The Trustees may adopt and offer to Shareholders such dividend reinvestment
plans, cash dividend payout plans or similar plans as the Trustees deem
appropriate.
Section 2. Redemptions. Each Shareholder of a Series shall have the right
-----------
at such times as may be permitted by the Trustees to require the Series to
redeem all or any part of his Shares at a redemption price per Share equal to
the Net Asset Value per Share at such time as the Trustees shall have prescribed
by resolution, or, to the extent permitted by the 1940 Act, at such other
redemption price and at such times as the Trustees shall prescribe by
resolution. In the absence of such resolution, the redemption price per Share
shall be the Net Asset Value next determined after receipt by the Series of a
request for redemption in proper form less such charges as are determined by the
Trustees and described in the Trust's Registration Statement for that Series, as
from time to time in effect, under the Securities Act of 1933. The Trustees may
specify conditions, prices, and places of redemption, may specify binding
requirements for the proper form or forms of requests for redemption and may
specify the amount of any deferred sales charge to be withheld from redemption
proceeds. Payment of the redemption price may be wholly or partly in securities
or other assets at the value of such securities or assets used in such
determination of Net Asset Value, or may be in cash. Upon redemption, Shares
may be reissued from time to time. The Trustees may require Shareholders to
redeem Shares for any reason under terms set by the Trustees, including, but not
limited to, the failure of a Shareholder to supply a taxpayer identification
number if required to do so, or to have the minimum investment required (which
may vary by Series), or to pay when due for the purchase of Shares issued to
him. To the extent permitted by law, the Trustees may retain the proceeds of
any redemption of Shares required by them for payment of amounts due and owing
by a Shareholder to the Trust or any Series or Class or any governmental
authority. Notwithstanding the foregoing, the Trustees may postpone payment of
the redemption price and may suspend the right of the Shareholders to require
any Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
Section 3. Determination of Net Asset Value. The Trustees shall cause the
--------------------------------
Net Asset Value of Shares of each Series or Class to be determined from time to
time in a manner consistent with applicable laws and regulations. The Trustees
may delegate the power and duty to determine Net Asset Value per Share to one or
more Trustees or officers of the Trust or to a custodian, depository or other
agent appointed for such purpose. The Net Asset Value of Shares shall be
determined separately for each Series or Class at such times as may be
prescribed by the Trustees or, in the absence of action by the Trustees, as of
the close of regular trading on the New York Stock Exchange on each day for all
or part of which such Exchange is open for unrestricted trading.
Section 4. Suspension of Right of Redemption. If, as referred to in
---------------------------------
Section 2 of this Article, the
17
<PAGE>
Trustees postpone payment of the redemption price and suspend the right of
Shareholders to redeem their Shares, such suspension shall take effect at the
time the Trustees shall specify, but not later than the close of business on the
business day next following the declaration of suspension. Thereafter
Shareholders shall have no right of redemption or payment until the Trustees
declare the end of the suspension. If the right of redemption is suspended, any
Shareholder having tendered a redemption request may either withdraw his request
for redemption or receive payment based on the Net Asset Value per Share next
determined after the suspension terminates.
Section 5. Repurchase by Agreement. In addition to the redemption of
-----------------------
Shares otherwise provided in this Article VII, the Trust may repurchase Shares
directly, or through the Distributor or another agent designated for the
purpose, by agreement with the owner thereof at a price not exceeding the Net
Asset Value per Share determined as of the time when the purchase or contract of
purchase is made or the Net Asset Value as of any time which may be later
determined, provided payment is not made for the Shares prior to the time as of
which such Net Asset Value is determined.
ARTICLE VII
-----------
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
Section 1. Voting Powers. The Shareholders shall have power to vote only
-------------
with respect to (a) the election of Trustees to the extent and as provided in
Section 2 of this Article; (b) the removal of Trustees as provided in Article
II, Section 5(d); (c) any matter required to be approved by Shareholders of the
Trust or any Series or Class thereof under the 1940 Act; (d) any termination of
the Trust to the extent and as provided in Article IX, Section 4; (e) the
amendment of this Declaration to the extent and as provided in Article IX,
Section 8; and (f) such additional matters relating to the Trust as may be
required or authorized by law, this Declaration, or the By-laws or any
registration of the Trust with the Commission or any State, or as the Trustees
may consider desirable.
On any matter submitted to a vote of the Shareholders, all Shares shall be
voted in the aggregate not by individual Series or Class, except (a) when
required by the 1940 Act, Shares shall be voted by individual Series or Class,
and (b) when the Trustees have determined that the matter affects the interests
of only one or more Series or Class, then only the Shareholders of all such
Series or Classes shall be entitled to vote thereon. As determined by the
Trustees without the vote or consent of Shareholders, on any matter submitted to
a vote of Shareholders, either (i) each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote or (ii) each dollar of Net
Asset Value (number of Shares owned times Net Asset Value per share of such
Series or Class, as applicable) shall be entitled to one vote on any matter on
which such Shares are entitled to vote and each fractional dollar amount shall
be entitled to a proportionate fractional vote. Without limiting the power of
the Trustees in any way to designate otherwise in accordance with the preceding
sentence, the Trustees hereby establish that each whole Share shall be entitled
to one vote as to any matter on which it is entitled to vote and each fractional
Share shall be entitled to a proportionate fractional vote. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy or in any manner provided for in the By-laws. The By-laws may provide
that proxies may be given by any electronic or telecommunications device or in
any other manner, but if a proposal by anyone other than the officers or
Trustees is submitted to a vote of the Shareholders of any Series or Class, or
if there is a proxy contest or proxy solicitation or proposal in opposition to
any proposal by the officers or Trustees, Shares may be voted only in person or
by written proxy. Until Shares of a Series are issued, as to that Series the
Trustees may exercise all rights of Shareholders and may take any action
required or permitted to be taken by Shareholders by law, this Declaration or
the By-laws. Meetings of Shareholders shall be called and notice thereof and
record dates therefor shall be given and set as provided in the By-laws.
Section 2. Quorum; Required Vote. Except when a larger vote is required
---------------------
by law, this Declaration
18
<PAGE>
or the By-laws, holders of Shares of the Trust, Series or Class, as applicable,
representing one-third of the votes entitled to be cast at the meeting in person
or by proxy shall be a quorum for the transaction of business at a Shareholders'
meeting. Any lesser number shall be sufficient for adjournments. Any adjourned
session of a Shareholders' meeting may be held within a reasonable time without
further notice. Except when a larger vote is required by law, this Declaration
or the By-laws, holders of Shares representing a majority of votes present and
entitled to be cast at a Shareholders' meeting in person or by proxy shall
decide any matters to be voted upon with respect to the entire Trust except that
a plurality of such votes shall elect a Trustee; provided, that if this
Declaration or applicable law permits or requires that Shares be voted on any
matter by individual Series or Classes, then holders, except when a larger vote
is required by law, this Declaration or the By-laws, of Shares of that Series or
Class representing a majority of the votes present or entitled to be cast voting
at a Shareholders' meeting in person or by proxy on the matter shall decide that
matter insofar as that Series or Class is concerned, except that a plurality of
such votes shall elect a Series Trustee. With respect to any matter presented
by the Trustees to the Shareholders for approval, the shareholders may act as to
the Trust or any Series or Class by the written consent of holders of Shares of
the Trust, Series or Class, as the case may be, representing a majority (or such
other amount as may be required by applicable law) of the votes entitled to be
cast on the matters subject to such consent.
Section 3. Record Dates. For the purpose of determining the Shareholders
------------
of any Series (or Class) who are entitled to receive payment of any dividend or
of any other distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such other payment,
as the record date for determining the Shareholders of such Series (or Class)
having the right to receive such dividend or distribution. Without fixing a
record date, the Trustees may for distribution purposes close the register or
transfer books for one or more Series (or Classes) any time prior to the payment
of a distribution. Nothing in this Section shall be construed as precluding the
Trustees from setting different record dates for different Series (or Classes).
Section 4. Additional Provisions. The By-laws may include further
---------------------
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VIII
------------
EXPENSES OF THE TRUST AND SERIES
--------------------------------
Section 1. Payment of Expenses by the Trust. Subject to Article IV,
--------------------------------
Section 4, and Article IV, Section 3, the Trust or a particular Series shall
pay, or shall reimburse the Trustees from the assets belonging to all Series or
the particular Series, for their expenses (or the expenses of a Class of such
Series) and disburse ments, including, but not limited to, interest charges,
taxes, brokerage fees and commissions; expenses of issue, repurchase and
redemption of Shares; insurance premiums; applicable fees, interest charges and
expenses of third parties, including the Trust's investment advisers, managers,
administrators, distributors, custodians, transfer agents and fund accountants;
fees of pricing, interest, dividend, credit and other reporting services; costs
of membership in trade associations; telecommunications expenses; funds
transmission expenses; auditing, legal and compliance expenses (including, if
approved by the Trustees, an allocated portion of the legal, accounting and
compliance expenses incurred by the Investment Adviser, Administrator or other
service provider to the Trust); costs of forming the Trust and its Series and
maintaining its existence; costs of preparing and printing the prospectuses of
the Trust and each Series, statements of additional information and Shareholder
reports and delivering them to Shareholders; expenses of meetings of
Shareholders and proxy solicitations therefor; costs of maintaining books and
accounts; costs of reproduction, stationery and supplies; fees and expenses of
the Trustees; compensation of the Trust's officers and employees and costs of
other personnel performing services for the Trust or any Series; costs of
Trustee meetings; Commission registration fees and related expenses; state or
foreign securities laws registration fees and related expenses; and for such
non-recurring items as may arise, including litigation to which the Trust or a
Series (or a Trustee or officer of
19
<PAGE>
the Trust acting as such) is a party, and for all losses and liabilities by them
incurred in administering the Trust. The Trustees shall have a lien on the
assets belonging to the appropriate Series, or in the case of an expense
allocable to more than one Series, on the assets of each such Series, prior to
any rights or interests of the Shareholders thereto, for the reimbursement to
them of such expenses, disbursements, losses and liabilities.
Section 2. Payment of Expenses by Shareholders. The Trustees shall have
-----------------------------------
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series of Class, to pay directly, in advance
or arrears, for charges of the Trust's custodian or transfer, shareholder
servicing or similar agent, an amount fixed from time to time by the Trustees,
by setting off such charges due from such Shareholder from declared but unpaid
dividends owed such Shareholder and/or by reducing the number of Shares in the
account of such Shareholder by that number of full and/or fractional Shares
which represents the outstanding amount of such charges due from such
Shareholder.
ARTICLE IX
----------
MISCELLANEOUS
-------------
Section 1. Trust Not a Partnership. This Declaration creates a trust and
-----------------------
not a partnership. No Trustee shall have any power to bind personally either
the Trust's officers or any Shareholder.
Section 2. Trustee Action. The exercise by the Trustees of their powers
--------------
and discretion hereunder in good faith and with reasonable care under the
circumstances then prevailing shall be binding upon everyone interested.
Subject to the provisions of Article IV, the Trustees shall not be liable for
errors of judgment or mistakes of fact or law.
Section 3. Record Dates. The Trustees may fix in advance a date up to
------------
ninety (90) days before the date of any Shareholders' meeting, or the date for
the payment of any dividends or other distributions, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
Shares shall go into effect as a record date for the determination of the
Shareholders entitled to notice of, and to vote at, any such meeting, or
entitled to receive payment of such dividend or other distribution, or to
receive any such allotment of rights, or to exercise such rights in respect of
any such change, conversion or exchange of Shares.
Section 4. Termination of the Trust. (a) This Trust shall have perpetual
------------------------
existence. Upon the vote of a majority of the Shares Outstanding and entitled
to vote of the Trust or of each Series to be affected, the Trustees may
(i) sell and convey all or substantially all of the assets of all Series or
any affected Series to another Series or to another entity which is an
open-end investment company as defined in the 1940 Act, or is a series
thereof, for adequate consideration, which may include the assumption of
all outstanding obligations, taxes and other liabilities, accrued or
contingent, of the Trust or any affected Series, and which may include
shares of or interests in such Series, entity, or series thereof; or
(ii) at any time sell and convert into money all or substantially all of
the assets of all Series or any affected Series.
Upon paying or making reasonable provision for the payment of all known
liabilities of all Series or any affected Series in either (i) or (ii), by such
assumption or otherwise, the Trustees shall distribute the remaining proceeds or
assets (as the case may be) ratably among the Shareholders of all Series or any
affected Series; however, the payment to any particular Class of such Series may
be reduced by any fees, expenses or charges allocated to that Class.
(b) The Trustees may take any of the actions specified in subsection (a)
(i) and (ii) above without
20
<PAGE>
obtaining the vote of a majority of the Shares Outstanding and entitled to vote
of the Trust or any Series if a majority of the Trustees determines, in their
sole discretion, that the continuation of the Trust or Series is not in the best
interests of the Trust, such Series, or their respective Shareholders. In
reaching such determination, the Trustees may consider such factors as the
Trustees, in their sole discretion, deem to be appropriate, which factors may
include the inability of the Trust or a Series to maintain its assets at an
appropriate size, changes in laws or regulations governing the Trust or the
Series or affecting assets of the type in which the Trust or Series invests, or
economic developments or trends having a significant adverse impact on the
business or operations of the Trust or such Series.
(c) Upon completion of the distribution of the remaining proceeds or assets
pursuant to subsection (a), the Trust or affected Series shall terminate and the
Trustees and the Trust shall be discharged of any and all further liabilities
and duties hereunder with respect thereto and the right, title and interest of
all parties therein shall be canceled and discharged. Upon termination of the
Trust, following completion of winding up of its business, the Trustees shall
cause a certificate of cancellation of the Trust's certificate of trust to be
filed in accordance with the Delaware Act, which certificate of cancellation may
be signed by any one Trustee.
Section 5. Reorganization and Master/Feeder. (a) Notwithstanding
--------------------------------
anything else herein, a majority of the Trustees may, without Shareholder
approval unless such approval is required by applicable federal law, (i) cause
the Trust to merge or consolidate with or into one or more entities, if the
surviving or resulting entity is the Trust or another open-end management
investment company under the 1940 Act, or a series thereof, (ii) cause the
Shares to be exchanged under or pursuant to any state or federal statute to the
extent permitted by law, or (iii) cause the Trust to incorporate under the laws
of Delaware or any other U.S. jurisdiction. Any agreement of merger or
consolidation or certificate of merger may be signed by a majority of Trustees
and facsimile signatures conveyed by electronic or telecommunication means shall
be valid.
(b) Pursuant to and in accordance with the provisions of Section 3815(f) of
the Delaware Act, an agreement of merger or consolidation approved by the
Trustees in accordance with this Section 5 may effect any amendment to the
Declaration or effect the adoption of a new trust instrument of the Trust if it
is the surviving or resulting trust in the merger or consolidation.
(c) The Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all or
portion of the Trust Property or the Trust Property allocated or belonging to
such Series or to carry on any business in which the Trust shall directly or
indirectly have any interest, or to sell, convey and transfer all or a portion
of the Trust Property or the Trust Property allocated or belonging to such
Series to any such corporation, trust, association or organization in exchange
for the shares or securities thereof or otherwise, and to lend money to,
subscribe for the shares or securities of, and enter into any contracts with any
such corporation, trust, partnership, association, or organization or any
corporation, partnership, trust, association or organization in which the Trust
or such Series holds or is about to acquire shares or any other interest. The
Trustees may also cause a merger or consolidation between the Trust or any
successor thereto and any such corporation, trust, partnership, association or
other organization if and to the extent permitted by law, as provided under the
law then in effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in organizing
one or more corporations, trusts, partnerships, associations or other
organizations and selling, conveying or transferring all or a portion of the
Trust Property to such organization or entities.
(d) Notwithstanding anything else herein, the Trustees may, without
Shareholder approval, invest all or a portion of the Trust Property of any
Series, or dispose of all or a portion of the Trust Property of any Series, and
invest the proceeds of such disposition in interests issued by one or more other
investment companies registered under the 1940 Act. Any such other investment
company may (but need not) be a trust (formed under the laws of the State of New
York or any other state or jurisdiction) (or subtrust thereof) which is
classified as a partnership for federal income tax purposes. Notwithstanding
anything else herein, the
21
<PAGE>
Trustees may, without Shareholder approval unless such approval is required by
applicable law, cause a Series that is organized in the master/feeder fund
structure to withdraw or redeem its Trust Property from the master fund and
cause such series to invest its Trust Property directly in securities and other
financial instruments or in another master fund.
Section 6. Declaration of Trust. The original or a copy of this
--------------------
Declaration of Trust and of each amendment hereto or Declaration of Trust
supplemental shall be kept at the office of the Trust where it may be inspected
by any Shareholder. Anyone dealing with the Trust may rely on a certificate by
a Trustee or an officer of the Trust as to the authenticity of the Declaration
of Trust or any such amendments or supplements and as to any matters in
connection with the Trust. The masculine gender herein shall include the
feminine and neuter genders. Headings herein are for convenience only and shall
not affect the construction of this Declaration of Trust. This Declaration of
Trust may be executed in any number of counterparts, each of which shall be
deemed an original.
Section 7. Applicable Law. This Declaration and the Trust created
--------------
hereunder are governed by and construed and administered according to the
Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (a) the provisions of Section 3540 of Title 12 of the
Delaware Code, or (b) any provisions of the laws (statutory or common) of the
State of Delaware pertaining to trusts which relate to or regulate (i) the
filing with any court or governmental body or agency of trustee accounts or
schedules of trustee fees and charges, (ii) affirmative requirements to post
bonds for trustees, officers, agents or employees of a trust, (iii) the
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards of responsibilities or limitations on the acts or powers of
trustees, which are inconsistent with the limitations or liabilities or
authorities and powers of the Trustees set forth or referenced in this
Declaration. The Trust shall be of the type commonly called a Delaware business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust under Delaware law. The
Trust specifically reserves the right to exercise any of the powers or
privileges afforded to trusts or actions that may be engaged in by trusts under
the Delaware Act, and the absence of a specific reference herein to any such
power, privilege or action shall not imply that the Trust may not exercise such
power or privilege or take such actions.
Section 8. Amendments. The Trustees may, without any Shareholder vote,
----------
amend or otherwise supplement this Declaration by making an amendment, a
Declaration of Trust supplemental hereto or an amended and restated trust
instrument; provided, that Shareholders shall have the right to vote on any
amendment (a) which would adversely affect the voting rights of Shareholders
granted in Article VII, Section l, (b) to this Section 8, (c) required to be
approved by Shareholders by law or by the Trust's registration statement(s)
filed with the Commission, and (d) submitted to them by the Trustees in their
discretion. Any amendment submitted to Shareholders which the Trustees
determine would affect the Shareholders of any Series shall be authorized by
vote of the Shareholders of such Series and no vote shall be required of
Shareholders of a Series not affected. Notwithstanding anything else herein,
any amendment to Article IV which would have the effect of reducing the
indemnification and other rights provided thereby to Trustees, officers,
employees, and agents of the Trust or to Shareholders or former Shareholders,
and any repeal or amendment of this sentence shall each require the affirmative
vote of the holders of two-thirds of the Outstanding Shares of the Trust
entitled to vote thereon.
Section 9. Derivative Actions. In addition to the requirements set forth
------------------
in Section 3816 of the Delaware Act, a Shareholder may bring a derivative action
on behalf of the Trust only if the following conditions are met:
22
<PAGE>
(a) Shareholders eligible to bring such derivative action under the
Delaware Act who hold at least 10% of the Outstanding Shares of the Trust, 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 such claim. The
Trustees shall be entitled to retain counsel or other advisers in considering
the merits of the request and shall require an undertaking by the Shareholders
making such request to reimburse the Trust for the expense of any such advisers
in the event that the Trustees determine not to bring such action.
Section 10. Fiscal Year. The fiscal year of the Series shall end on a
-----------
specified date as set forth in the By-laws; provided that different Series may
have different fiscal years. The Trustees may change the fiscal year of any
Series without Shareholder approval.
Section 11. Severability. The provisions of this Declaration are
------------
severable. If the Trustees determine, with the advice of counsel, that any
provision hereof conflicts with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination. If any
provision hereof shall be held invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall attach only to such provision only in
such jurisdiction and shall not affect any other provision of this Declaration.
23
<PAGE>
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,
24
<PAGE>
Richard P. Strubel
as Trustee and not individually,
/netuser10/suzanp/phelan/101842.259/1997proxy/dt4.wpf25
25
<PAGE>
EXHIBIT 2
BY-LAWS
OF
GOLDMAN SACHS TRUST
ARTICLE I
DEFINITIONS
All capitalized terms have the respective meanings given them in the
Agreement and Declaration of Trust of Goldman Sachs Trust dated January 28,
1997, as amended or restated from time to time.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the principal
----------------------------
office of the Trust shall be in Chicago, Illinois. A separate principal office
may be designated with respect to any series of the Trust.
Section 2. Other Offices. The Trust may have offices in such other places
--------------------------
without as well as within the State of Delaware as the Trustees may from time to
time determine.
Section 3. Registered Office and Registered Agent. The Board of Trustees
--------------------------------------------------
shall establish a registered office in the State of Delaware and shall appoint
as the Trust's registered agent for service of process in the State of Delaware
an individual resident of the State of Delaware or a Delaware corporation or a
corporation authorized to transact business in the State of Delaware; in each
case the business office of such registered agent for service of process shall
be identical with the registered Delaware office of the Trust.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. Meetings of the Shareholders of the Trust or a
--------------------
Series or Class thereof shall be held as provided in the Declaration at such
place within or without the State of Delaware as the Trustees shall designate.
The holders of Shares representing one-third of the votes entitled to be cast at
such meeting present in person or by proxy shall constitute a quorum at any
meeting of the Shareholders of the Trust or a Series or Class thereof.
Section 2. Notice of Meetings. Notice of all meetings of the
------------------------------
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail or telegraphic or electronic means to each
Shareholder at his address as recorded on the register of the Trust mailed at
least (10) days and not more than
1
<PAGE>
ninety (90) days before the meeting, provided, however, that notice of a meeting
-------- -------
need not be given to a Shareholder to whom such notice need not be given under
the proxy rules of the Commission under the 1940 Act and the Securities Exchange
Act of 1934, as amended. Any adjourned meeting may be held as adjourned without
further notice. No notice need be given to any Shareholder who shall have
failed to inform the Trust of his current address or if a written waiver of
notice, executed before or after the meeting by the Shareholder or his attorney
thereunto authorized, is filed with the records of the meeting.
Section 3. Record Date for Meetings and Other Purposes. For the purpose
-------------------------------------------------------
of determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to participate in any distribution, or for the purpose of any other
action, the Trustees may from time to time close the transfer books for such
period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determination of the
persons to be treated as Shareholders of record for such purposes, except for
dividend payments which shall be governed by the Declaration.
Section 4. Proxies. Subject to the provisions of the Declaration, every
-------------------
Person entitled to vote for Trustees or on any other matter shall have the right
to do so either in person or by proxy, provided that either (i) an instrument
authorizing such a proxy to act is executed by the Shareholder in writing and
dated not more than eleven (11) months before the meeting, unless the instrument
specifically provides for a longer period or (ii) the Trustees adopt an
electronic, telephonic, computerized or other alternative to execution of a
written instrument authorizing the proxy to act which authorization is received
not more than eleven (11) months before the meeting. A proxy shall be deemed
executed by a Shareholder if the Shareholder's name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission or otherwise
by the Shareholder or the Shareholder's attorney-in- fact or other authorized
agent. A valid proxy that does not state that it is irrevocable shall continue
in full force and effect unless (i) revoked by the person executing it before
the vote pursuant to that proxy by a writing delivered to the Trust stating that
the proxy is revoked by a subsequent proxy executed by, or attendance at the
meeting and voting in person by, the person executing that proxy or revoked by
such person using any electronic, telephonic, computerized or other alternative
means authorized by the Trustees for authorizing the proxy to act; or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the Trust before the vote pursuant to that proxy is counted. A proxy with
respect to Shares held in the name of two or more Persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.
Section 5. Abstentions and Broker Non-Votes. Outstanding Shares
--------------------------------------------
represented in person or by proxy (including Shares which abstain or do not vote
with respect to one or more of any proposals presented for Shareholder approval)
will be counted for purposes of determining whether a quorum is present at a
meeting. Abstentions will be treated as Shares that are present and entitled to
vote for purposes of determining the number of Shares that are present and
entitled to vote with respect to any particular proposal, but will not be
counted as a vote in favor of such proposal. If a broker or nominee holding
Shares in "street name" indicates on the proxy that it does not have
discretionary authority to vote as to a particular proposal, those Shares will
not be considered as present and entitled to vote with respect to such proposal.
Section 6. Inspection of Records. The records of the Trust shall be open
---------------------------------
to inspection by Shareholders to the same extent as is permitted shareholders of
a Delaware business corporation.
2
<PAGE>
Section 7. Action without Meeting. Any action which may be taken by
---------------------------------
Shareholders may be taken without a meeting if the holders of Shares entitled
to cast a majority of the votes entitled to be cast on the matter (or such
larger proportion thereof as shall be required by law) consent to the action in
writing and the written consents are filed with the records of the meetings of
Shareholders. Such consents shall be treated for all purposes as a vote taken
at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
------------------------------------
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, the Chairman
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer or Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be given by telephone, cable, wireless, facsimile or other
electronic mechanism to each Trustee at his business address (or such other
location designated by the Trustee to an officer of the Trust), or personally
delivered to him at least one day before the meeting. Such notice may, however,
be waived by any Trustee. Notice of a meeting need not be given to any Trustee
if a written waiver of notice, executed by him before or after the meeting, is
filed with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him. A notice or waiver of notice need not specify the purpose of any meeting.
Subject to applicable law, the Trustees may meet as provided in the Declaration
(including by means of a telephone conference circuit or similar communications
equip ment by means of which all persons participating in the meeting can hear
each other at the same time) and participation by such means (or any other means
provided in the Declaration) shall be deemed to have been held at a place
designated by the Trustees at the meeting. Participation in a meeting held by
telephone conference (or any other means provided in the Declaration) shall
constitute presence in person at such meeting. Any action required or permitted
to be taken at any meeting of the Trustees may be taken by the Trustees without
a meeting if a majority of the Trustees consent to the action in writing and the
written consents are filed with the records of the Trustees' meetings. Such
consents shall be treated as a vote for all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees shall
--------------------------------------
be present in person at any regular or special meeting of the Trustees in order
to constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration or these By-laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the absence of a quorum, a
majority of the Trustees present may adjourn the meeting from time to time until
a quorum shall be present. Notice of an adjourned meeting need not be given.
ARTICLE V
COMMITTEES
3
<PAGE>
Section 1. Executive and Other Committees. The Trustees by vote of a
------------------------------------------
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not fewer than two (2) members to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust or a Series thereof, and such
other powers of the Trustees as the Trustees may delegate to them, from time to
time, except those powers which by law, the Declaration or these By-laws they
are prohibited from delegating. The Trustees may also elect from their own
number and from the officers of the Trust other Committees from time to time;
the number composing such Committees, the powers conferred upon the same
(subject to the same limitations as with respect to the Executive Committee) and
the term of membership on such Committees to be determined by the Trustees. The
Trustees may designate a chairman of any such Committee. In the absence of such
designation the Committee may elect its own Chairman. The creation of other
committees, including committees comprised of persons other than Trustees, and
the delegation of specific authority to one or more Trustees may also be
accomplished as provided in the Declaration.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
------------------------------------------------
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit.
The Executive Committee, if constituted, shall keep regular minutes of its
meetings and records of decisions taken without a meeting and cause them to be
recorded in a book designated for that purpose and kept in the office of the
Trust.
ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
------------------------------
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise
---------------------------------------------
provided by law, the Declaration or these By-laws, the President, the Treasurer,
the Secretary and any other officer shall each hold office at the pleasure of
the Board of Trustees or until his successor shall have been duly elected and
qualified. The Secretary and the Treasurer may be the same person. A Vice
President and the Treasurer or a Vice President and the Secretary may be the
same person, but the offices of Secretary and Treasurer shall not be held by the
same person. The President shall hold no other office. Except as above
provided, any two offices may be held by the same person. Any officer may be
but none need be a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of
-------------------
the Trustees, may remove any officer with or without cause, by a vote of a
majority of the Trustees then in office. Any officer or agent
4
<PAGE>
appointed by an officer or committee may be removed with or without cause by
such appointing officer or committee.
Section 4. Powers and Duties of the Chairman. The Trustees may, but need
---------------------------------------------
not, appoint from among their number a Chairman. When present he may preside at
the meetings of the Shareholders and of the Trustees. He may call meetings of
the Trustees and of any committee thereof whenever he deems it necessary. He
shall have, with the President, general supervision over the business and
policies of the Trust, subject to the limitations imposed upon the President, as
provided in Section 5 of this Article VI.
Section 5. Powers and Duties of the President. The President may call
----------------------------------------------
meetings of the Trustees and of any Committee thereof when he deems it necessary
and shall preside at all meetings of the Shareholders. Subject to the control
of the Trustees and to the control of any Committees of the Trustees, within
their respective spheres, as provided by the Trustees, he shall at all times
exercise a general supervision and direction over the affairs of the Trust. He
shall have the power to employ attorneys and counsel for the Trust or any Series
or Class thereof and to employ such subordinate officers, agents, clerks and
employees as he may find necessary to transact the business of the Trust or any
Series or Class thereof. He shall also have the power to grant, issue, execute
or sign such powers of attorney, proxies or other documents as may be deemed
advisable or necessary in furtherance of the interests of the Trust or any
Series thereof. The President shall have such other powers and duties, as from
time to time may be conferred upon or assigned to him by the Trustees.
Section 6. Powers and Duties of Vice Presidents. In the absence or
------------------------------------------------
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees, shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees and the President.
Section 7. Powers and Duties of the Treasurer. The Treasurer shall be the
----------------------------------------------
principal financial and accounting officer of the Trust. He shall deliver all
funds of the Trust or any Series or Class thereof which may come into his hands
to such Custodian as the Trustees may employ. He shall render a statement of
condition of the finances of the Trust or any Series or Class thereof to the
Trustees as often as they shall require the same and he shall in general perform
all the duties incident to the office of a Treasurer and such other duties as
from time to time may be assigned to him by the Trustees.
Section 8. Powers and Duties of the Secretary. The Secretary shall keep
----------------------------------------------
the minutes of all meetings of the Trustees and of the Shareholders in proper
books provided for that purpose; he shall have custody of the seal of the Trust;
he shall have charge of the Share transfer books, lists and records unless the
same are in the charge of a transfer agent. He shall attend to the giving and
serving of all notices by the Trust in accordance with the provisions of these
By-laws and as required by law; and subject to these By-laws, he shall in
general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him by the Trustees.
Section 9. Powers and Duties of Assistant Officers. In the absence or
---------------------------------------------------
disability of the Treasurer, any officer designated by the Trustees shall
perform all the duties, and may exercise any of the powers, of the Treasurer.
Each officer shall perform such other duties as from time to time may be
assigned to him by the Trustees. Each officer performing the duties and
exercising the powers of the Treasurer, if any, and any
5
<PAGE>
Assistant Treasurer, shall give a bond for the faithful discharge of his duties,
if required so to do by the Trustees, in such sum and with such surety or
sureties as the Trustees shall require.
Section 10. Powers and Duties of Assistant Secretaries. In the absence or
-------------------------------------------------------
disability of the Secretary, any Assistant Secretary designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 11. Compensation of Officers and Trustees and Members of the
---------------------------------------------------------------------
Advisory Board. Subject to any applicable provisions of the Declaration, the
- --------------
compensation of the officers and Trustees and members of an advisory board shall
be fixed from time to time by the Trustees or, in the case of officers, by any
Committee or officer upon whom such power may be conferred by the Trustees. No
officer shall be prevented from receiving such compensation as such officer by
reason of the fact that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal years of the Series of the Trust shall end on the date in each
year as set forth in the Trust's Registration Statement on Form N-1A, as amended
from time to time; provided that in the absence of such designation, the fiscal
year of any Series that invest primarily in equity securities shall end on
January 31st of each year, the fiscal year of any Series that invests primarily
in debt securities shall end on October 31st of each year, and the fiscal year
of any Series which is a money market fund shall end on December 31st of each
year; provided, however, that the Trustees may from time to time change the
fiscal years. The taxable year of each Series of the Trust shall be as
determined by the Trustees or officers of the Trust from time to time.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
SUFFICIENCY AND WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By- laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been sent by mail, telegraph, cable, wireless, facsimile or other electronic
means for the purposes of these By-laws when it has been delivered to a
representative of any company holding itself out as capable of sending notice by
such means with instructions that it be so sent.
6
<PAGE>
ARTICLE X
AMENDMENTS
Except as otherwise provided by applicable law or by the Declaration, these
By-laws may be amended, restated, supplemented or repealed by the Trustees.
END OF BY-LAWS
7
<PAGE>
EXHIBIT 5
[GOLDMAN SACHS TRUST]
[GOLDMAN SACHS MONEY MARKET TRUST]
4900 Sears Tower
Chicago, Illinois 60606
April 30, 1997
Goldman Sachs Asset Management
One New York Plaza,
New York, New York 10004
MANAGEMENT AGREEMENT
--------------------
Dear Sirs:
[Goldman Sachs Trust][Goldman Sachs Money Market Trust] (the "Registrant") has
been organized as a [business trust under the laws of the State of Delaware]
[business trust under the laws of the Commonwealth of Massachusetts] 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 Board of 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
<PAGE>
provisions of the Registrant's Declaration of Trust and By-Laws and of the
1940 Act, and to the 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 Board of
Trustees of the Registrant may from time to time establish.
(b) Subject to the general supervision of the Board of 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 Board of Trustees such
periodic and special reports as the Board 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 Board of 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
2
<PAGE>
affiliated with you; (xi) the cost of preparing and distributing reports and
notices to shareholders, the 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 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 Board of 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
3
<PAGE>
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on 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
Board of 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 Board of 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 Board of
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 Board of 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 [Money Market] Trust is the designation of the
Trustees for the time being under [an Amended and Restated Agreement and
Declaration of Trust], [under a Declaration of Trust dated January 29, 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.
4
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the 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 MONEY MARKET TRUST]
[GOLDMAN SACHS TRUST]
Attest:_______________________________ By: ________________________________
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:_______________________________ By: ________________________________
Michael J. Richman David B. Ford
Counsel to the Funds Group Managing Director
5
<PAGE>
EXHIBIT 5
[GOLDMAN SACHS EQUITY PORTFOLIOS, INC.]
[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.]
[address]
MANAGEMENT AGREEMENT
--------------------
Dear Sirs:
[Goldman Sachs Trust] [Goldman Sachs Equity Portfolios, Inc.] (the "Registrant")
has been organized as a [business trust under the laws of the State of Delaware]
[business trust under the laws of the Commonwealth of Massachusetts] [a
corporation under the laws of the State of Maryland] 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 Board of [Trustees/Directors]. 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/Directors] 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
<PAGE>
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
[Articles of Incorporation] [Declaration of Trust] and By-Laws and of the
1940 Act, and to the 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 Board of
[Trustees/Directors] of the Registrant may from time to time establish.
(b) Subject to the general supervision of the Board of
[Trustees/Directors] 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 Board of
[Trustees/Directors] such periodic and special reports as the Board 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 Board of
[Trustees/Directors] 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/Directors]
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
2
<PAGE>
maintaining the registration of the Funds and registering the Registrant as a
broker or a dealer; (x) the fees and expenses of [Trustees/Directors] of the
Registrant who are not affiliated with you; (xi) the cost of preparing and
distributing reports and notices to shareholders, the 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 Board of
[Trustees/Directors] 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
3
<PAGE>
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 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/Directors] 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 Board of [Trustees/Directors] 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 Board of [Trustees/Directors] 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 Board of
[Trustees/Directors] of the Registrant, including a majority of the
[Trustees/Directors] 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
a new Fund to Annex A provided such amendment is approved by a majority of the
Board of [Trustees/Directors] of the Registrant, including a majority of the
[Trustees/Directors] 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 [an Amended and Restated Agreement and Declaration of Trust
dated December 5, 1991], [under a Declaration of Trust dated January 29, 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.
4
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance on the 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 EQUITY PORTFOLIOS, INC.]
[GOLDMAN SACHS TRUST]
Attest:_________________________ By: _________________________
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.]
[GOLDMAN SACHS FUNDS MANAGEMENT L.P.]
[GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL]
[AN AFFILIATE OF GOLDMAN, SACHS & CO.]
Attest:_________________________ By: _________________________
Michael J. Richman David B. Ford
Counsel to the Funds Group [title]
6
