<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
INSTITUTIONAL SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is not a
prospectus. This Additional Statement describes each of the above-referenced
series of Goldman Sachs Trust. This Additional Statement should be read in
conjunction with the prospectus for the Institutional Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Core Fixed Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs High Yield 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
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<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-57
Management B-60
Portfolio Transactions B-76
Shares of the Trust B-79
Net Asset Value B-85
Taxation B-86
Performance Information B-98
Other Information B-111
Financial Statements B-112
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET
ADVISER TO GOLDMAN SACHS MANAGEMENT INTERNATIONAL
SHORT DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS CORE FIXED GLOBAL INCOME FUND
INCOME FUND AND GOLDMAN 133 PETERBOROUGH COURT
SACHS HIGH YIELD FUND LONDON EC4A 2BB, ENGLAND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. DISTRIBUTOR
ADVISER TO GOLDMAN SACHS 85 BROAD STREET
ADJUSTABLE RATE GOVERNMENT FUND NEW YORK, NY 10004
AND GOLDMAN SACHS SHORT DURATION
GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004 GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) .......800-621-2550
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INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue five classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B. Shares. Adjustable Rate Fund is authorized to issue four classes of
shares: Institutional Shares, Administration Shares, Service Shares and Class A
Shares. Global Income Fund and High Yield Fund are authorized to issue four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. Government Income Fund and Municipal Income Fund are each
authorized to issue two classes of shares: Class A Shares and Class B Shares.
Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain
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securities in which the respective Fund may invest. However, unlike
certificates of deposits, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing
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primarily in adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, maintaining a maximum duration of
two years and a target duration equal to that of a six-month to one-year U.S.
Treasury security, and utilizing certain active management techniques to seek to
hedge interest rate risk. Short Duration Government Fund seeks to minimize net
asset value fluctuations by utilizing certain interest rate hedging techniques
and by maintaining a maximum duration of not more than three years. The
duration target of the Short Duration Government Fund is that of the 2-year U.S.
Treasury Security plus or minus .5 years. There is no assurance that these
strategies for the Adjustable Rate Fund and Short Duration Government Fund will
always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
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to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
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current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
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Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
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access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
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those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
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valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
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Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
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Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the
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Mortgage Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
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the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose
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penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
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<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
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<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. The Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be
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<PAGE>
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution
B-19
<PAGE>
date. Principal prepayments on the Mortgage Loans or the Mortgage Assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class certificates ("PAC Certificates"), which are parallel pay
REMIC Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates, even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fund, Government Income Fund and Global Fund may
also invest in
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<PAGE>
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately-issued SMBS may not be readily marketable and will be
considered illiquid for purposes of each Fund's limitation on investments in
illiquid securities. The Adviser may determine that SMBS which are U.S.
Government Securities are liquid for purposes of each Fund's limitation on
investments in illiquid securities in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders
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<PAGE>
in proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed
B-23
<PAGE>
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
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<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
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<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace
such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-29
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-30
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
B-31
<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
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<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
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<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
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<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
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<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
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to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that a Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of the currency specified in
the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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<PAGE>
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the
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<PAGE>
Funds and the Advisers believe that swaps do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to a Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the
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<PAGE>
risk that it will be required to purchase the underlying securities at a price
in excess of the securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type
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<PAGE>
in which it may invest. The purchase of a call option would entitle a Fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. A Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which
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involves writing or purchasing options on one currency to seek to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, Global Income, Core and High Yield Funds may purchase
call options on currency to seek to increase total return when the Advisers
anticipate that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value 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
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<PAGE>
protective put options would tend to be offset by countervailing changes in the
value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the
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Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present a risk of loss even if the
yield of one of the underlying securities remains constant, or if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation
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<PAGE>
as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-thecounter options and all assets used to cover written over-
thecounter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a
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<PAGE>
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Core, Global Income and High Yield Funds may each seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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
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<PAGE>
value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for
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<PAGE>
traditional hedging purposes -- i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that a Fund owns or futures contracts will be purchased
to protect a Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of 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.
B-52
<PAGE>
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of
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<PAGE>
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities in which the Core Fund and High Yield Fund invest will be subject to
the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain
B-54
<PAGE>
SMBS, municipal leases, certain over-the-counter options, securities that are
not readily marketable and Restricted Securities, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific Restricted Securities, that such Restricted Securities are liquid.
Certain commercial paper issued in reliance on Section 4(2) of the 1933 Act is
treated like Rule 144A Securities. The Trustees have adopted guidelines and
delegated to the Advisers the daily function of determining and monitoring the
liquidity of the Funds' portfolio securities. The Board of Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly how
the market for Restricted Securities sold and offered under Rule 144A or Section
4(2) will develop, the Trustees will carefully monitor the Funds' investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets,
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<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. Securities purchased or sold on a when-issued or forward
commitment basis involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the 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
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<PAGE>
a Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
risk of losing some or all of the principal and interest involved in the
transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a
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Municipal Security that is not a general obligation is made by the Adviser based
on the characteristics of the Municipal Security, the most important of which is
the source of funds for the payment of principal and interest on such
securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to 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
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<PAGE>
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements
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<PAGE>
maturing in more than seven days, securities which are not readily
marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
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Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP
B-60
<PAGE>
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Director, Federal Express Corporation since 1976; Evanston Hospital
Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski, Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman prior thereto.
B-61
<PAGE>
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Freidman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of April 1, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-62
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-63
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-64
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-65
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-66
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-67
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
</TABLE>
- ----------
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after
B-68
<PAGE>
fee waivers). Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable
Adviser at its discretion at any time, although they have no current
intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- ----------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
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<PAGE>
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such administrative services include, subject to
the general supervision of the Trustees of the Trust, (a) providing supervision
of all aspects of the Funds' non-investment operations (other than certain
operations performed by others pursuant to agreements with the Funds), (b)
providing the Funds, to the extent not provided pursuant to the agreement with
the Trust's custodian, transfer and dividend disbursing agent or agreements with
other institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be
B-70
<PAGE>
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
B-71
<PAGE>
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will
B-72
<PAGE>
consider the effect of redemptions on a Fund and other shareholders in deciding
whether to redeem its shares.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated April 30, 1997. Pursuant to the distribution agreement,
after the Funds' Prospectuses and periodic reports have been prepared, set in
type and mailed to shareholders, Goldman Sachs will pay for the printing and
distribution of copies thereof used in connection with the offering to
prospective investors. Goldman Sachs will also pay for other supplementary
sales literature and advertising costs. Goldman Sachs has entered into sales
agreements with certain investment dealers and financial service firms (the
"Authorized Dealers") to solicit subscriptions for Class A and Class B Shares of
each of the Funds that offer such classes of shares. Goldman Sachs receives a
portion of the sales load imposed on the sale, in the case of Class A Shares, or
redemption in the case of Class B Shares, of such Fund shares. No Class B Shares
were outstanding during the fiscal years ended October 31, 1994 and 1995.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------ ------ ----
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
</TABLE>
- ----------
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
B-73
<PAGE>
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1996, 1995 and 1994 by each Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ----------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
B-74
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future
B-75
<PAGE>
at its discretion. For the fiscal year ended October 31, 1996, October 31, 1995
and October 31, 1994, Other Expenses of each Fund were reduced by the Advisers
in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a
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<PAGE>
given security and the resale price of such security). In certain foreign
countries, debt securities in which the Global Income Fund, Core Fund and High
Yield Fund may invest are traded on exchanges at fixed commission rates. In
connection with portfolio transactions, the Management Agreement provides that
the Advisers shall attempt to obtain the best net price and the most favorable
execution. The Management Agreement provides that, on occasions when an Adviser
deems the purchase or sale of a security to be in the best interests of a Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which the Advisers or an affiliate act as
investment adviser), a Fund, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net price and most favorable execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the applicable Adviser in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
applicable Fund and such other customers. In some instances, this procedure may
adversely affect the size and price of the position obtainable for a Fund. The
Management Agreement permits each Adviser, in its discretion, to purchase and
sell portfolio securities to and from dealers who provide the Trust with
brokerage or research services in which dealers may execute brokerage
transactions at a higher cost to the Fund. Brokerage and research services
furnished by firms through which the Fund's effect their securities transactions
may be used by the Advisers in servicing other accounts and not all of these
services may be used by the Adviser in connection with the specific Fund
generating the brokerage credits. The fees received under the Management
Agreement are not reduced by reason of the Adviser receiving such brokerage and
research services. In addition, in selecting brokers and dealers, the Advisers
may take into account sales of shares of the Funds and other funds in the
Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
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<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ==================== ==============
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $ 2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-78
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of five classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B Shares; (ii) the issuance of four classes of shares of Adjustable Rate
Fund: Institutional Shares, Administration Shares, Service Shares and Class A
Shares; (iii) the issuance of four classes of shares of Global Income Fund and
High Yield Fund: Institutional Shares, Service Shares, Class A Shares and Class
B Shares; and (iv) the issuance of two classes of Municipal Income Fund and
Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1996, no Service Shares of the Adjustable Rate Fund were outstanding; no Class A
or Class B shares of Short Duration Government Fund, Short Duration Tax-Free
Fund and Core Fund were outstanding; and no shares of High Yield Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents a
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<PAGE>
proportionate interest in the assets belonging to the applicable class of the
Fund. All expenses of a Fund are borne at the same rate by each class of
shares, except that fees under Administration and Service Plans are borne
exclusively by Administration and Service Shares, fees under Distribution and
Authorized Dealer Service Plans are borne exclusively by Class A Shares or Class
B Shares and transfer agency fees are borne at different rates by Class A Shares
or Class B Shares than Institutional, Administration and Service Shares. The
Trustees may determine in the future that it is appropriate to allocate other
expenses differently between classes of shares and may do so to the extent
consistent with the rules of the SEC and positions of the Internal Revenue
Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. Currently,
shares of a class may only be exchanged for shares of the same or an equivalent
class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain
B-80
<PAGE>
other financial services firms that have sales arrangements with Goldman Sachs.
Class B shares bear the cost of distribution (Rule 12b-1) fees at the aggregate
rate of up to 0.75% of the average daily net assets attributable to Class B
shares. Class B shares also bear the cost of an Authorized Dealer Service Plan
at an annual rate of up to 0.25% of the average daily net assets attributable to
Class B shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Dividends paid by
each Fund, if any, with respect to each class of shares will be calculated in
the same manner, at the same time on the same day and will be in the same
amount, except for differences caused by the fact that the respective account
administration, service, authorized dealer service plan and distribution fees
relating to a particular class will be borne exclusively by that class.
Similarly, the net asset value per share may differ depending upon the class of
shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of April 1, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Security Bank of Idaho, FBO Idaho Housing Agency, P.O. Box
30007, Salt Lake City, UT (6.30%); First Trust of New York, N.A., Mr. Sean
Cullen, 100 Wall Street, Suite 1600, New York, NY (11.71%); Foundation for New
ERA Philanthropy, Arlin M. Adams, Trustee, 1600 Market Street, 36th Floor,
Philadelphia, PA 19102 (8.88%); Fundex Corporation, Attn: Mr. Mitsuru Hashimoto,
1875 S. Grant Street, Suite 1000, San Mateo, CA 94402-2671 (12.40%); State
Treasurer/Nebraska Investment Council, Attn: Gayle Ducker, 941 "O" Street,
Lincoln, NE 68508 (6.75%); Short Duration Government Fund -- Berko Accounts, 150
East 69th Street, New York, NY 10021-5704 (5.57%); Central Carolina Bank & Trust
Co., Mr. Norwood Thomas, Jr., Senior V.P. & T.O., P.O. Box 931, Durham, NC 27702
(7.49%); Norwest Bank Iowa NA, c/o Norwest Bank Minnesota NA, Attn: Betty
Gunderson, P.O. Box 1450 NW 6477, Minneapolis, MN 55400-1450 (7.26%); Richfield
Bank & Trust Co., Kirchbak Co., Attn: Judith A. Ferguson, 6625 Lyndale Avenue
South, Richfield, MN 55423 (12.48%); State Street Bank & Trust Co., Rena
Williams, P.O. Box 1992, Boston, MA 02105-992 (34.05%); Short Duration Tax-Free
Fund -- Donald R. Gant, Partner, Goldman, Sachs
B-81
<PAGE>
& Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.63%); First
Interstate BK - Agent/Amer NB, Stratosphere Corp. Inden 3/9/95, Attn: Rose Robb,
3800 Howard Hughes Parkway, Las Vegas, NV 89193-8588 (8.12%); G-K-G, Inc.,
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (9.23%); Indiana
Trust & Investment Management Co., Attn: Tina Taylor, 3930 Edison Lakes Parkway,
Suite 250, Mishawaka, IN 46545 (9.69%); Nelda Start, Attn: Mr. Walte Riedel,
P.O. Box 903, Orange, TX 77631-0909 (6.80%); Robert A. Cenci, Trust Trustee, GS
Profit Sharing Master Trust, Attn: Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992 (16.08%); First National Bank of North Dakota, Attn: Josie Wahl, P.O.
Box 6001, Grand Forks, ND 58206-6001 (5.76%); Government Income Fund -Frontier
Trust Co. Inc. TR, FBO Dade County Public School, Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-
5547 (9.52%); Charles Machine Works, Inc., ESOP & Trust Asset Allocation
Account, Mike Stodola, Trustee, P.O. Box 66, 1959 West Fir Street, Perry, OK
73077-5803 (7.42%); Bob Smith MD Foundation, 3811 Turtle Creek Centre #2150,
Dallas, TX 75219-4454 (6.60%); Core Fund -- Local 234 Electric Workers
Retirement Fund, Attn: Ronald D. Carpenter, 10300 Merritt Street, Castroville,
CA 95012 (7.20%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
B-82
<PAGE>
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
B-83
<PAGE>
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by
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<PAGE>
reason or willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent unaffiliated broker identified by the portfolio manager/trader and
contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on
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the National Association of Securities Dealers Automated Quotations System
("NASDAQ") will be valued at the last sale price on the exchange or system in
which they are principally traded, on the valuation date. If there is no sale on
the valuation day, securities traded principally: (i) on a U.S. exchange or
NASDAQ will be valued at the mean between the closing bid and asked prices, and
(ii) on a foreign exchange will be valued at the official bid price. The last
sale price and official bid price for securities traded principally on a foreign
exchange will be determined as of the close of the London Foreign Exchange; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked prices; (c) options and futures contracts will be valued at the
last sale price in the market where such contract is principally traded; and (d)
forward foreign currency exchange contracts will be valued at the mean between
the last bid and asked quotations supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
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insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In
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addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's or Global Income
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward contracts for
purposes other than hedging currency risk with respect to securities in Core
Fund's or Global Income Fund's portfolio or anticipated to be acquired may not
qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of
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securities or other sources. If for any taxable year a Fund does not qualify as
a regulated investment company, it will be taxed on all of its investment
company taxable income and net capital gain at corporate rates, its net tax-
exempt interest (if any) may be subject to the alternative minimum tax, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby
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commitment." The Tax Exempt Funds may pay for a standby commitment either
separately, in cash, or in the form of a higher price for the securities which
are acquired subject to the standby commitment, thus increasing the cost of
securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging
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transactions entered into by a Fund, that Fund may be required to defer the
recognition of losses on futures or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
related positions held by the Fund and the characterization of gains or losses
as long-term or short-term may be changed. The short-short test described above
may limit each Fund's ability to use options, futures and forward transactions
as well as its ability to engage in short sales. The tax provisions described
above applicable to options, futures and forward contracts may affect the
amount, timing, and character of a Fund's distributions to shareholders. Certain
tax elections may be available to the Funds to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may
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not make this election for any particular taxable year. Core Fund will not
satisfy the 50% requirement described above and, therefore, will not make this
election. Core Fund and, if it does not make the election, Global Income Fund
will, however, be entitled to deduct such taxes in computing the amounts they
are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such
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companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core, Global Income or High Yield Funds is
timely distributed to its shareholders. Core, Global Income or High Yield Funds
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require Core, Global Income or
High Yield Funds to recognize taxable income or gain without the concurrent
receipt of cash. Core, Global Income or High Yield Funds may limit and/or manage
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex
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requirements that must be satisfied on a continuing basis in order for bonds to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed
facility fails to comply with such requirements at any time, interest on the
bond could become taxable, retroactive to the date the obligation was issued. In
that event, a portion of a Tax Exempt Fund's distributions attributable to
interest the Fund received on such bond for the current year and for prior years
could be characterized or recharacterized as taxable income. The availability of
tax-exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the applicable
requirements, dividends paid by the Fund which are attributable to tax exempt
interest on Municipal Securities and designated by the Fund as exempt-interest
dividends in a written notice mailed to its shareholders within sixty days after
the close of its taxable year may be treated by shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code.
Exempt-interest dividends a Tax Exempt Fund receives from other regulated
investment companies, including exempt-interest dividends on auction rate
preferred securities of such companies held by a Fund, are treated as interest
on Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond
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interest, recognized market discount income, original issue discount income
accrued with respect to taxable bonds, income from repurchase agreements, income
from securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash
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and will have a cost basis in the shares received equal to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a
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tax preference item a percentage of distributions which is not equal to the
actual amount of tax-exempt income or tax preference item income earned by Short
Duration Tax-Free Fund or Municipal Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment
B-97
<PAGE>
company taxable income distributed by a Fund to a shareholder who is not a U.S.
person will be subject to U.S. withholding tax at the rate of 30% (or a lower
rate provided by an applicable tax treaty) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a shareholder who is not a U.S. person will not
be subject to U.S. federal income or withholding tax unless the distributions
are effectively connected with the shareholder's trade or business in the United
States or, in the case of a shareholder who is a nonresident alien individual,
the shareholder is present in the United States for 183 days or more during the
taxable year and certain other conditions are met. Non-U.S. shareholders may
also be subject to U.S. withholding tax on deemed income resulting from any
election by Global Income Fund to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
B-98
<PAGE>
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-99
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class A
or Class B Shares which is based upon a Fund's net asset value per share would
be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- ---- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ----------- ----------- ------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ---------- -------------- --------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12, 1995.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced operations
on February 28, 1996. Service Shares of Short Duration Government Fund
commenced operations on April 10, 1996. An aggregate total return (not
annualized) is shown instead of an average annual total return since
Administration and Service Shares have not completed a full 12 months of
operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February 28,
1996. Service Shares of Core Fund commenced operations on March 13, 1996. An
aggregate total return (not annualized) is shown instead of an average
annual total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5%
of the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
5f No Service Shares of Global Income Fund were outstanding during the periods
indicated.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1, 1996.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to time
advertise their performance relative to certain indices, any components of such
indices and benchmark investments, including but not limited to: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund
Report (which provides industry averages for 7-day annualized and compounded
yields of taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and the
characteristics of a Fund's benchmark investments are not identical to, and in
some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-
B-111
<PAGE>
day period for any one shareholder. Each Fund, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of each
respective Fund at the time of redemption by a distribution in kind of
securities (instead of cash) from such Fund. The securities distributed in kind
would be readily marketable and would be valued for this purpose using the same
method employed in calculating each Fund's net asset value per share. See "Net
Asset Value." If a shareholder receives redemption proceeds in kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1996
Annual Report are hereby incorporated by reference and attached hereto. A copy
of the annual reports may be obtained without charge by writing Goldman, Sachs &
Co., 4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs &
Co., at the telephone number on the back cover of each Fund's Prospectus.
B-112
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
times over the future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
3-A
<PAGE>
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
4-A
<PAGE>
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by
5-A
<PAGE>
Standard & Poor's is described as having a strong degree of safety regarding
timely payment.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
6-A
<PAGE>
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating
7-A
<PAGE>
category. Plus and minus signs, however, are not used in the AAA, DDD, DD, or D
Categories.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed
to meet scheduled principal and/or interest payment.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
9-A
<PAGE>
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
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
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Administration Shares of each of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund and Goldman Sachs Core Fixed Income
Fund, each dated May 1, 1997, as amended and/or supplemented from time to time
(each a "Prospectus"), which may be obtained without charge from institutions
("Service Organizations") that hold Administration Shares for the benefit of
their customers, or from Goldman, Sachs & Co. by calling the telephone number,
or writing to one of the addresses, listed below. Goldman Sachs Global Income
Fund does not offer Administration Shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-57
Management B-60
Portfolio Transactions B-76
Shares of the Trust B-79
Net Asset Value B-85
Taxation B-86
Performance Information B-98
Other Information B-111
Financial Statements B-112
Administration Plan B-113
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
ADVISER TO GOLDMAN SACHS DISTRIBUTOR
SHORT DURATION TAX-FREE FUND 85 BROAD STREET
AND GOLDMAN SACHS CORE FIXED NEW YORK, NEW YORK 10004
INCOME FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND GOLDMAN SACHS SHORT DURATION
GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
TOLL FREE .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue five classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B. Shares. Adjustable Rate Fund is authorized to issue four classes of
shares: Institutional Shares, Administration Shares, Service Shares and Class A
Shares. Global Income Fund and High Yield Fund are authorized to issue four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. Government Income Fund and Municipal Income Fund are each
authorized to issue two classes of shares: Class A Shares and Class B Shares.
Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain
B-3
<PAGE>
securities in which the respective Fund may invest. However, unlike
certificates of deposits, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing
B-4
<PAGE>
primarily in adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, maintaining a maximum duration of
two years and a target duration equal to that of a six-month to one-year U.S.
Treasury security, and utilizing certain active management techniques to seek to
hedge interest rate risk. Short Duration Government Fund seeks to minimize net
asset value fluctuations by utilizing certain interest rate hedging techniques
and by maintaining a maximum duration of not more than three years. The
duration target of the Short Duration Government Fund is that of the 2-year U.S.
Treasury Security plus or minus .5 years. There is no assurance that these
strategies for the Adjustable Rate Fund and Short Duration Government Fund will
always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
B-10
<PAGE>
valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
B-11
<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
B-12
<PAGE>
Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the
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Mortgage Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
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the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose
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penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
B-16
<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
B-17
<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. The Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be
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<PAGE>
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution
B-19
<PAGE>
date. Principal prepayments on the Mortgage Loans or the Mortgage Assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class certificates ("PAC Certificates"), which are parallel pay
REMIC Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates, even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fund, Government Income Fund and Global Fund may
also invest in
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<PAGE>
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately-issued SMBS may not be readily marketable and will be
considered illiquid for purposes of each Fund's limitation on investments in
illiquid securities. The Adviser may determine that SMBS which are U.S.
Government Securities are liquid for purposes of each Fund's limitation on
investments in illiquid securities in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders
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<PAGE>
in proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed
B-23
<PAGE>
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
B-25
<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
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<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace
such
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<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-29
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-30
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
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<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
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<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
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<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
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<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
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liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
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to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that a Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of the currency specified in
the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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forward contracts to seek to increase total return when the Advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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<PAGE>
INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the
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<PAGE>
Funds and the Advisers believe that swaps do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to a Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the
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risk that it will be required to purchase the underlying securities at a price
in excess of the securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type
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in which it may invest. The purchase of a call option would entitle a Fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. A Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which
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involves writing or purchasing options on one currency to seek to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, Global Income, Core and High Yield Funds may purchase
call options on currency to seek to increase total return when the Advisers
anticipate that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value 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
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<PAGE>
protective put options would tend to be offset by countervailing changes in the
value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the
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Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present a risk of loss even if the
yield of one of the underlying securities remains constant, or if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation
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as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-thecounter options and all assets used to cover written over-
thecounter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a
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Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Core, Global Income and High Yield Funds may each seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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
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value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for
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traditional hedging purposes -- i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that a Fund owns or futures contracts will be purchased
to protect a Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of 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.
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Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of
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<PAGE>
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities in which the Core Fund and High Yield Fund invest will be subject to
the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain
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<PAGE>
SMBS, municipal leases, certain over-the-counter options, securities that are
not readily marketable and Restricted Securities, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific Restricted Securities, that such Restricted Securities are liquid.
Certain commercial paper issued in reliance on Section 4(2) of the 1933 Act is
treated like Rule 144A Securities. The Trustees have adopted guidelines and
delegated to the Advisers the daily function of determining and monitoring the
liquidity of the Funds' portfolio securities. The Board of Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly how
the market for Restricted Securities sold and offered under Rule 144A or Section
4(2) will develop, the Trustees will carefully monitor the Funds' investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets,
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<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. Securities purchased or sold on a when-issued or forward
commitment basis involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the 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
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<PAGE>
a Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
risk of losing some or all of the principal and interest involved in the
transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a
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Municipal Security that is not a general obligation is made by the Adviser based
on the characteristics of the Municipal Security, the most important of which is
the source of funds for the payment of principal and interest on such
securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to 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
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purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements
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maturing in more than seven days, securities which are not readily
marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP
B-60
<PAGE>
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Director, Federal Express Corporation since 1976; Evanston Hospital
Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski, Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman prior thereto.
B-61
<PAGE>
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Freidman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of April 1, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-62
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-63
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
B-64
<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-65
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-66
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
B-67
<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
</TABLE>
- ----------
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after
B-68
<PAGE>
fee waivers). Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable
Adviser at its discretion at any time, although they have no current
intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- ----------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
B-69
<PAGE>
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such administrative services include, subject to
the general supervision of the Trustees of the Trust, (a) providing supervision
of all aspects of the Funds' non-investment operations (other than certain
operations performed by others pursuant to agreements with the Funds), (b)
providing the Funds, to the extent not provided pursuant to the agreement with
the Trust's custodian, transfer and dividend disbursing agent or agreements with
other institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be
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<PAGE>
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
B-71
<PAGE>
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will
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<PAGE>
consider the effect of redemptions on a Fund and other shareholders in deciding
whether to redeem its shares.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated April 30, 1997. Pursuant to the distribution agreement,
after the Funds' Prospectuses and periodic reports have been prepared, set in
type and mailed to shareholders, Goldman Sachs will pay for the printing and
distribution of copies thereof used in connection with the offering to
prospective investors. Goldman Sachs will also pay for other supplementary
sales literature and advertising costs. Goldman Sachs has entered into sales
agreements with certain investment dealers and financial service firms (the
"Authorized Dealers") to solicit subscriptions for Class A and Class B Shares of
each of the Funds that offer such classes of shares. Goldman Sachs receives a
portion of the sales load imposed on the sale, in the case of Class A Shares, or
redemption in the case of Class B Shares, of such Fund shares. No Class B Shares
were outstanding during the fiscal years ended October 31, 1994 and 1995.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------ ------ ----
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
</TABLE>
- ----------
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
B-73
<PAGE>
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1996, 1995 and 1994 by each Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ----------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
B-74
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future
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<PAGE>
at its discretion. For the fiscal year ended October 31, 1996, October 31, 1995
and October 31, 1994, Other Expenses of each Fund were reduced by the Advisers
in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a
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<PAGE>
given security and the resale price of such security). In certain foreign
countries, debt securities in which the Global Income Fund, Core Fund and High
Yield Fund may invest are traded on exchanges at fixed commission rates. In
connection with portfolio transactions, the Management Agreement provides that
the Advisers shall attempt to obtain the best net price and the most favorable
execution. The Management Agreement provides that, on occasions when an Adviser
deems the purchase or sale of a security to be in the best interests of a Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which the Advisers or an affiliate act as
investment adviser), a Fund, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net price and most favorable execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the applicable Adviser in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
applicable Fund and such other customers. In some instances, this procedure may
adversely affect the size and price of the position obtainable for a Fund. The
Management Agreement permits each Adviser, in its discretion, to purchase and
sell portfolio securities to and from dealers who provide the Trust with
brokerage or research services in which dealers may execute brokerage
transactions at a higher cost to the Fund. Brokerage and research services
furnished by firms through which the Fund's effect their securities transactions
may be used by the Advisers in servicing other accounts and not all of these
services may be used by the Adviser in connection with the specific Fund
generating the brokerage credits. The fees received under the Management
Agreement are not reduced by reason of the Adviser receiving such brokerage and
research services. In addition, in selecting brokers and dealers, the Advisers
may take into account sales of shares of the Funds and other funds in the
Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
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<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ==================== ==============
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $ 2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-78
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of five classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B Shares; (ii) the issuance of four classes of shares of Adjustable Rate
Fund: Institutional Shares, Administration Shares, Service Shares and Class A
Shares; (iii) the issuance of four classes of shares of Global Income Fund and
High Yield Fund: Institutional Shares, Service Shares, Class A Shares and Class
B Shares; and (iv) the issuance of two classes of Municipal Income Fund and
Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1996, no Service Shares of the Adjustable Rate Fund were outstanding; no Class A
or Class B shares of Short Duration Government Fund, Short Duration Tax-Free
Fund and Core Fund were outstanding; and no shares of High Yield Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents a
B-79
<PAGE>
proportionate interest in the assets belonging to the applicable class of the
Fund. All expenses of a Fund are borne at the same rate by each class of
shares, except that fees under Administration and Service Plans are borne
exclusively by Administration and Service Shares, fees under Distribution and
Authorized Dealer Service Plans are borne exclusively by Class A Shares or Class
B Shares and transfer agency fees are borne at different rates by Class A Shares
or Class B Shares than Institutional, Administration and Service Shares. The
Trustees may determine in the future that it is appropriate to allocate other
expenses differently between classes of shares and may do so to the extent
consistent with the rules of the SEC and positions of the Internal Revenue
Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. Currently,
shares of a class may only be exchanged for shares of the same or an equivalent
class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain
B-80
<PAGE>
other financial services firms that have sales arrangements with Goldman Sachs.
Class B shares bear the cost of distribution (Rule 12b-1) fees at the aggregate
rate of up to 0.75% of the average daily net assets attributable to Class B
shares. Class B shares also bear the cost of an Authorized Dealer Service Plan
at an annual rate of up to 0.25% of the average daily net assets attributable to
Class B shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Dividends paid by
each Fund, if any, with respect to each class of shares will be calculated in
the same manner, at the same time on the same day and will be in the same
amount, except for differences caused by the fact that the respective account
administration, service, authorized dealer service plan and distribution fees
relating to a particular class will be borne exclusively by that class.
Similarly, the net asset value per share may differ depending upon the class of
shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of April 1, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Security Bank of Idaho, FBO Idaho Housing Agency, P.O. Box
30007, Salt Lake City, UT (6.30%); First Trust of New York, N.A., Mr. Sean
Cullen, 100 Wall Street, Suite 1600, New York, NY (11.71%); Foundation for New
ERA Philanthropy, Arlin M. Adams, Trustee, 1600 Market Street, 36th Floor,
Philadelphia, PA 19102 (8.88%); Fundex Corporation, Attn: Mr. Mitsuru Hashimoto,
1875 S. Grant Street, Suite 1000, San Mateo, CA 94402-2671 (12.40%); State
Treasurer/Nebraska Investment Council, Attn: Gayle Ducker, 941 "O" Street,
Lincoln, NE 68508 (6.75%); Short Duration Government Fund -- Berko Accounts, 150
East 69th Street, New York, NY 10021-5704 (5.57%); Central Carolina Bank & Trust
Co., Mr. Norwood Thomas, Jr., Senior V.P. & T.O., P.O. Box 931, Durham, NC 27702
(7.49%); Norwest Bank Iowa NA, c/o Norwest Bank Minnesota NA, Attn: Betty
Gunderson, P.O. Box 1450 NW 6477, Minneapolis, MN 55400-1450 (7.26%); Richfield
Bank & Trust Co., Kirchbak Co., Attn: Judith A. Ferguson, 6625 Lyndale Avenue
South, Richfield, MN 55423 (12.48%); State Street Bank & Trust Co., Rena
Williams, P.O. Box 1992, Boston, MA 02105-992 (34.05%); Short Duration Tax-Free
Fund -- Donald R. Gant, Partner, Goldman, Sachs
B-81
<PAGE>
& Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.63%); First
Interstate BK - Agent/Amer NB, Stratosphere Corp. Inden 3/9/95, Attn: Rose Robb,
3800 Howard Hughes Parkway, Las Vegas, NV 89193-8588 (8.12%); G-K-G, Inc.,
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (9.23%); Indiana
Trust & Investment Management Co., Attn: Tina Taylor, 3930 Edison Lakes Parkway,
Suite 250, Mishawaka, IN 46545 (9.69%); Nelda Start, Attn: Mr. Walte Riedel,
P.O. Box 903, Orange, TX 77631-0909 (6.80%); Robert A. Cenci, Trust Trustee, GS
Profit Sharing Master Trust, Attn: Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992 (16.08%); First National Bank of North Dakota, Attn: Josie Wahl, P.O.
Box 6001, Grand Forks, ND 58206-6001 (5.76%); Government Income Fund -Frontier
Trust Co. Inc. TR, FBO Dade County Public School, Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-
5547 (9.52%); Charles Machine Works, Inc., ESOP & Trust Asset Allocation
Account, Mike Stodola, Trustee, P.O. Box 66, 1959 West Fir Street, Perry, OK
73077-5803 (7.42%); Bob Smith MD Foundation, 3811 Turtle Creek Centre #2150,
Dallas, TX 75219-4454 (6.60%); Core Fund -- Local 234 Electric Workers
Retirement Fund, Attn: Ronald D. Carpenter, 10300 Merritt Street, Castroville,
CA 95012 (7.20%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
B-82
<PAGE>
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
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<PAGE>
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by
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<PAGE>
reason or willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent unaffiliated broker identified by the portfolio manager/trader and
contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on
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the National Association of Securities Dealers Automated Quotations System
("NASDAQ") will be valued at the last sale price on the exchange or system in
which they are principally traded, on the valuation date. If there is no sale on
the valuation day, securities traded principally: (i) on a U.S. exchange or
NASDAQ will be valued at the mean between the closing bid and asked prices, and
(ii) on a foreign exchange will be valued at the official bid price. The last
sale price and official bid price for securities traded principally on a foreign
exchange will be determined as of the close of the London Foreign Exchange; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked prices; (c) options and futures contracts will be valued at the
last sale price in the market where such contract is principally traded; and (d)
forward foreign currency exchange contracts will be valued at the mean between
the last bid and asked quotations supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
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insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In
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addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's or Global Income
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward contracts for
purposes other than hedging currency risk with respect to securities in Core
Fund's or Global Income Fund's portfolio or anticipated to be acquired may not
qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of
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securities or other sources. If for any taxable year a Fund does not qualify as
a regulated investment company, it will be taxed on all of its investment
company taxable income and net capital gain at corporate rates, its net tax-
exempt interest (if any) may be subject to the alternative minimum tax, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby
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commitment." The Tax Exempt Funds may pay for a standby commitment either
separately, in cash, or in the form of a higher price for the securities which
are acquired subject to the standby commitment, thus increasing the cost of
securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging
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transactions entered into by a Fund, that Fund may be required to defer the
recognition of losses on futures or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
related positions held by the Fund and the characterization of gains or losses
as long-term or short-term may be changed. The short-short test described above
may limit each Fund's ability to use options, futures and forward transactions
as well as its ability to engage in short sales. The tax provisions described
above applicable to options, futures and forward contracts may affect the
amount, timing, and character of a Fund's distributions to shareholders. Certain
tax elections may be available to the Funds to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may
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not make this election for any particular taxable year. Core Fund will not
satisfy the 50% requirement described above and, therefore, will not make this
election. Core Fund and, if it does not make the election, Global Income Fund
will, however, be entitled to deduct such taxes in computing the amounts they
are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such
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companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core, Global Income or High Yield Funds is
timely distributed to its shareholders. Core, Global Income or High Yield Funds
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require Core, Global Income or
High Yield Funds to recognize taxable income or gain without the concurrent
receipt of cash. Core, Global Income or High Yield Funds may limit and/or manage
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex
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requirements that must be satisfied on a continuing basis in order for bonds to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed
facility fails to comply with such requirements at any time, interest on the
bond could become taxable, retroactive to the date the obligation was issued. In
that event, a portion of a Tax Exempt Fund's distributions attributable to
interest the Fund received on such bond for the current year and for prior years
could be characterized or recharacterized as taxable income. The availability of
tax-exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the applicable
requirements, dividends paid by the Fund which are attributable to tax exempt
interest on Municipal Securities and designated by the Fund as exempt-interest
dividends in a written notice mailed to its shareholders within sixty days after
the close of its taxable year may be treated by shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code.
Exempt-interest dividends a Tax Exempt Fund receives from other regulated
investment companies, including exempt-interest dividends on auction rate
preferred securities of such companies held by a Fund, are treated as interest
on Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond
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interest, recognized market discount income, original issue discount income
accrued with respect to taxable bonds, income from repurchase agreements, income
from securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash
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and will have a cost basis in the shares received equal to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a
B-96
<PAGE>
tax preference item a percentage of distributions which is not equal to the
actual amount of tax-exempt income or tax preference item income earned by Short
Duration Tax-Free Fund or Municipal Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment
B-97
<PAGE>
company taxable income distributed by a Fund to a shareholder who is not a U.S.
person will be subject to U.S. withholding tax at the rate of 30% (or a lower
rate provided by an applicable tax treaty) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a shareholder who is not a U.S. person will not
be subject to U.S. federal income or withholding tax unless the distributions
are effectively connected with the shareholder's trade or business in the United
States or, in the case of a shareholder who is a nonresident alien individual,
the shareholder is present in the United States for 183 days or more during the
taxable year and certain other conditions are met. Non-U.S. shareholders may
also be subject to U.S. withholding tax on deemed income resulting from any
election by Global Income Fund to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
B-98
<PAGE>
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-99
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class A
or Class B Shares which is based upon a Fund's net asset value per share would
be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- ---- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ----------- ----------- ------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ---------- -------------- --------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12, 1995.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced operations
on February 28, 1996. Service Shares of Short Duration Government Fund
commenced operations on April 10, 1996. An aggregate total return (not
annualized) is shown instead of an average annual total return since
Administration and Service Shares have not completed a full 12 months of
operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February 28,
1996. Service Shares of Core Fund commenced operations on March 13, 1996. An
aggregate total return (not annualized) is shown instead of an average
annual total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5%
of the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
5f No Service Shares of Global Income Fund were outstanding during the periods
indicated.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1, 1996.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to time
advertise their performance relative to certain indices, any components of such
indices and benchmark investments, including but not limited to: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund
Report (which provides industry averages for 7-day annualized and compounded
yields of taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and the
characteristics of a Fund's benchmark investments are not identical to, and in
some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-
B-111
<PAGE>
day period for any one shareholder. Each Fund, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of each
respective Fund at the time of redemption by a distribution in kind of
securities (instead of cash) from such Fund. The securities distributed in kind
would be readily marketable and would be valued for this purpose using the same
method employed in calculating each Fund's net asset value per share. See "Net
Asset Value." If a shareholder receives redemption proceeds in kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1996
Annual Report are hereby incorporated by reference and attached hereto. A copy
of the annual reports may be obtained without charge by writing Goldman, Sachs &
Co., 4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs &
Co., at the telephone number on the back cover of each Fund's Prospectus.
B-112
<PAGE>
ADMINISTRATION PLAN
Each Fund has adopted an administration plan (the "Plan") with respect
to its Administration Shares which authorizes it to compensate Service
Organizations for providing certain account administration services to their
customers who are beneficial owners of such Shares. Pursuant to the Plans, a
Fund enters into agreements with Service Organizations which purchase
Administration Shares on behalf of their customers ("Service Agreements").
Under such Service Agreements the Service Organizations may perform some or all
of the following services: (a) act, directly or through an agent, as the sole
shareholder of record and nominee for all customers, (b) maintain account
records for each customer who beneficially owns Administration Shares of a Fund,
(c) answer questions and handle correspondence from customers regarding their
accounts, (d) process customer orders to purchase, redeem and exchange
Administration Shares of a Fund and handle the transmission of funds
representing the customers' purchase price or redemption proceeds, and (e) issue
confirmations for transactions in shares by customers. As compensation for such
services, a Fund will pay each Service Organization an account administration
fee in an amount up to 0.25% (on an annualized basis) of the average daily net
assets of the Administration Shares of such Fund attributable to or held in the
name of such Service Organization. For the fiscal years ended October 31, 1996,
1995 and 1994, administration fees accrued by the Funds were as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- -------------------------------- ------ ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund $9,833 $12,632 $17,648
Core Fund $ 741 * *
Short Duration Government Fund $ 107 $ 425 $28,422
Short Duration Tax-Free Fund $ 129 $ 1,244 $13,825
- ------------------
</TABLE>
* No Administration Shares of Core Fund were outstanding at October 31, 1995
and October 31, 1994.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Administration Shares of a Fund. Service Organizations, including
banks regulated by the Comptroller of the Currency, the Federal Reserve Board or
the Federal Deposit Insurance Corporation, and investment advisers and other
money managers subject to the jurisdiction of the SEC, the Department of Labor
or state securities commissions, are urged to consult legal advisers before
investing fiduciary assets in Administration Shares of a Fund. In addition,
under some state securities laws, banks and other financial institutions
purchasing Administration Shares on behalf of their customers may be required to
register as dealers.
B-113
<PAGE>
The Plans with respect to Adjustable Rate Fund, Short Duration Government
Fund, Short Duration Tax-Free Fund and Core Fund were approved by The Goldman
Sachs Group, L.P., as the sole shareholder of Administration Shares of each
Fund. The Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plans or the related Service Agreements, most
recently voted to approve each Plan and Service Agreements at a meeting called
for the purpose of voting on such Plans and Service Agreements on April 23,
1997. The Plans 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. No Plan may be amended to increase materially the amount to be
spent for the services described therein without approval of the Administration
Shareholders of the applicable Fund and all material amendments of the Plans
must also be approved by the Board of Trustees in the manner described above.
Each Plan may be terminated at any time by a majority of the Board of Trustees
as described above or by vote of a majority of the outstanding Administration
Shares of the applicable Fund. The Service Agreements may be terminated at any
time, without payment of any penalty, by a vote of a majority of the Board of
Trustees as described above or by a vote of a majority of the outstanding
Administration Shares of the applicable Fund on not more than sixty (60) days'
written notice to any other party to the Service Agreements. The Service
Agreements will terminate automatically if assigned. So long as the Plans are
in effect, the selection and nomination of those Trustees who are not interested
persons will be committed to the discretion of the Trust's Nominating Committee,
which consists of all of the non-interested members of the Board of Trustees.
The Board of Trustees has determined that, in its judgment, there is a
reasonable likelihood that each Fund's Plan will benefit such Fund and the
holders of its Administration Shares. In the Board of Trustees' quarterly
review of the Plans and Service Agreements, the Board will consider continued
appropriateness and the level of compensation provided therein.
B-114
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
times over the future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
3-A
<PAGE>
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
4-A
<PAGE>
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by
5-A
<PAGE>
Standard & Poor's is described as having a strong degree of safety regarding
timely payment.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
6-A
<PAGE>
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating
7-A
<PAGE>
category. Plus and minus signs, however, are not used in the AAA, DDD, DD, or D
Categories.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed
to meet scheduled principal and/or interest payment.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
9-A
<PAGE>
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
SERVICE SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectuses for the Service Shares of each of Goldman Sachs Adjustable Rate
Government Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Short Duration Tax-Free Fund, Goldman Sachs Core Fixed Income Fund, Goldman
Sachs Global Income Fund and Goldman Sachs High Yield Fund, each dated May 1,
1997, as amended and/or supplemented from time to time (each a "Prospectus"),
which may be obtained without charge from institutions ("Service Organizations")
that hold Service Shares for the benefit of their customers, or by calling
Goldman, Sachs & Co. at the telephone number, or writing to one of the
addresses, listed below.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-57
Management B-60
Portfolio Transactions B-76
Shares of the Trust B-79
Net Asset Value B-85
Taxation B-86
Performance Information B-98
Other Information B-111
Financial Statements B-112
Service Plan B-113
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS SHORT INTERNATIONAL
DURATION TAX-FREE FUND, ADVISER TO GOLDMAN SACHS
GOLDMAN SACHS CORE FIXED GLOBAL INCOME FUND
INCOME FUND AND GOLDMAN 133 PETERBOROUGH COURT
SACHS HIGH YIELD FUND LONDON EC4A 2BB, ENGLAND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN, SACHS & CO.
MANAGEMENT, L.P. DISTRIBUTOR
ADVISER TO GOLDMAN SACHS 85 BROAD STREET
ADJUSTABLE RATE GOVERNMENT NEW YORK, NEW YORK 10004
FUND AND GOLDMAN SACHS SHORT
DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004 GOLDMAN, SACHS & CO.
TRANSFER AGENT
4900 SEARS TOWER
CHICAGO, ILLINOIS 60606
TOLL FREE (IN U.S.) .......800-621-2550
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue five classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B. Shares. Adjustable Rate Fund is authorized to issue four classes of
shares: Institutional Shares, Administration Shares, Service Shares and Class A
Shares. Global Income Fund and High Yield Fund are authorized to issue four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. Government Income Fund and Municipal Income Fund are each
authorized to issue two classes of shares: Class A Shares and Class B Shares.
Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain
B-3
<PAGE>
securities in which the respective Fund may invest. However, unlike
certificates of deposits, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing
B-4
<PAGE>
primarily in adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, maintaining a maximum duration of
two years and a target duration equal to that of a six-month to one-year U.S.
Treasury security, and utilizing certain active management techniques to seek to
hedge interest rate risk. Short Duration Government Fund seeks to minimize net
asset value fluctuations by utilizing certain interest rate hedging techniques
and by maintaining a maximum duration of not more than three years. The
duration target of the Short Duration Government Fund is that of the 2-year U.S.
Treasury Security plus or minus .5 years. There is no assurance that these
strategies for the Adjustable Rate Fund and Short Duration Government Fund will
always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
B-5
<PAGE>
to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
B-6
<PAGE>
current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
B-7
<PAGE>
Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
B-8
<PAGE>
access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
B-9
<PAGE>
those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
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valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
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<PAGE>
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
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Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the
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<PAGE>
Mortgage Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
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the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose
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<PAGE>
penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
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<PAGE>
primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
B-17
<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. The Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be
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distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution
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<PAGE>
date. Principal prepayments on the Mortgage Loans or the Mortgage Assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class certificates ("PAC Certificates"), which are parallel pay
REMIC Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates, even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fund, Government Income Fund and Global Fund may
also invest in
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<PAGE>
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately-issued SMBS may not be readily marketable and will be
considered illiquid for purposes of each Fund's limitation on investments in
illiquid securities. The Adviser may determine that SMBS which are U.S.
Government Securities are liquid for purposes of each Fund's limitation on
investments in illiquid securities in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders
B-22
<PAGE>
in proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed
B-23
<PAGE>
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
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<PAGE>
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
B-25
<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
B-26
<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace
such
B-27
<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
B-28
<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
B-29
<PAGE>
Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
B-30
<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
B-31
<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
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opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
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premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
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commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
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liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
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to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that a Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of the currency specified in
the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the
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Funds and the Advisers believe that swaps do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to a Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the
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risk that it will be required to purchase the underlying securities at a price
in excess of the securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type
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in which it may invest. The purchase of a call option would entitle a Fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. A Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which
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involves writing or purchasing options on one currency to seek to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, Global Income, Core and High Yield Funds may purchase
call options on currency to seek to increase total return when the Advisers
anticipate that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value 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
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<PAGE>
protective put options would tend to be offset by countervailing changes in the
value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the
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<PAGE>
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present a risk of loss even if the
yield of one of the underlying securities remains constant, or if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation
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<PAGE>
as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-thecounter options and all assets used to cover written over-
thecounter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a
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<PAGE>
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Core, Global Income and High Yield Funds may each seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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
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<PAGE>
value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for
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<PAGE>
traditional hedging purposes -- i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that a Fund owns or futures contracts will be purchased
to protect a Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of 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.
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<PAGE>
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of
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<PAGE>
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities in which the Core Fund and High Yield Fund invest will be subject to
the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain
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<PAGE>
SMBS, municipal leases, certain over-the-counter options, securities that are
not readily marketable and Restricted Securities, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific Restricted Securities, that such Restricted Securities are liquid.
Certain commercial paper issued in reliance on Section 4(2) of the 1933 Act is
treated like Rule 144A Securities. The Trustees have adopted guidelines and
delegated to the Advisers the daily function of determining and monitoring the
liquidity of the Funds' portfolio securities. The Board of Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly how
the market for Restricted Securities sold and offered under Rule 144A or Section
4(2) will develop, the Trustees will carefully monitor the Funds' investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets,
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<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. Securities purchased or sold on a when-issued or forward
commitment basis involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the 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
B-56
<PAGE>
a Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
risk of losing some or all of the principal and interest involved in the
transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a
B-57
<PAGE>
Municipal Security that is not a general obligation is made by the Adviser based
on the characteristics of the Municipal Security, the most important of which is
the source of funds for the payment of principal and interest on such
securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to 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
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<PAGE>
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements
B-59
<PAGE>
maturing in more than seven days, securities which are not readily
marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP
B-60
<PAGE>
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Director, Federal Express Corporation since 1976; Evanston Hospital
Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski, Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman prior thereto.
B-61
<PAGE>
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Freidman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of April 1, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
B-62
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-63
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
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<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
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<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
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<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
</TABLE>
- ----------
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after
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<PAGE>
fee waivers). Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable
Adviser at its discretion at any time, although they have no current
intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- ----------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
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<PAGE>
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such administrative services include, subject to
the general supervision of the Trustees of the Trust, (a) providing supervision
of all aspects of the Funds' non-investment operations (other than certain
operations performed by others pursuant to agreements with the Funds), (b)
providing the Funds, to the extent not provided pursuant to the agreement with
the Trust's custodian, transfer and dividend disbursing agent or agreements with
other institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be
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<PAGE>
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
B-71
<PAGE>
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will
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<PAGE>
consider the effect of redemptions on a Fund and other shareholders in deciding
whether to redeem its shares.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated April 30, 1997. Pursuant to the distribution agreement,
after the Funds' Prospectuses and periodic reports have been prepared, set in
type and mailed to shareholders, Goldman Sachs will pay for the printing and
distribution of copies thereof used in connection with the offering to
prospective investors. Goldman Sachs will also pay for other supplementary
sales literature and advertising costs. Goldman Sachs has entered into sales
agreements with certain investment dealers and financial service firms (the
"Authorized Dealers") to solicit subscriptions for Class A and Class B Shares of
each of the Funds that offer such classes of shares. Goldman Sachs receives a
portion of the sales load imposed on the sale, in the case of Class A Shares, or
redemption in the case of Class B Shares, of such Fund shares. No Class B Shares
were outstanding during the fiscal years ended October 31, 1994 and 1995.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------ ------ ----
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
</TABLE>
- ----------
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
B-73
<PAGE>
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1996, 1995 and 1994 by each Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ----------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
B-74
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future
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<PAGE>
at its discretion. For the fiscal year ended October 31, 1996, October 31, 1995
and October 31, 1994, Other Expenses of each Fund were reduced by the Advisers
in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a
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<PAGE>
given security and the resale price of such security). In certain foreign
countries, debt securities in which the Global Income Fund, Core Fund and High
Yield Fund may invest are traded on exchanges at fixed commission rates. In
connection with portfolio transactions, the Management Agreement provides that
the Advisers shall attempt to obtain the best net price and the most favorable
execution. The Management Agreement provides that, on occasions when an Adviser
deems the purchase or sale of a security to be in the best interests of a Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which the Advisers or an affiliate act as
investment adviser), a Fund, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net price and most favorable execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the applicable Adviser in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
applicable Fund and such other customers. In some instances, this procedure may
adversely affect the size and price of the position obtainable for a Fund. The
Management Agreement permits each Adviser, in its discretion, to purchase and
sell portfolio securities to and from dealers who provide the Trust with
brokerage or research services in which dealers may execute brokerage
transactions at a higher cost to the Fund. Brokerage and research services
furnished by firms through which the Fund's effect their securities transactions
may be used by the Advisers in servicing other accounts and not all of these
services may be used by the Adviser in connection with the specific Fund
generating the brokerage credits. The fees received under the Management
Agreement are not reduced by reason of the Adviser receiving such brokerage and
research services. In addition, in selecting brokers and dealers, the Advisers
may take into account sales of shares of the Funds and other funds in the
Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
B-77
<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ==================== ==============
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $ 2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
B-78
<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of five classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B Shares; (ii) the issuance of four classes of shares of Adjustable Rate
Fund: Institutional Shares, Administration Shares, Service Shares and Class A
Shares; (iii) the issuance of four classes of shares of Global Income Fund and
High Yield Fund: Institutional Shares, Service Shares, Class A Shares and Class
B Shares; and (iv) the issuance of two classes of Municipal Income Fund and
Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1996, no Service Shares of the Adjustable Rate Fund were outstanding; no Class A
or Class B shares of Short Duration Government Fund, Short Duration Tax-Free
Fund and Core Fund were outstanding; and no shares of High Yield Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents a
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<PAGE>
proportionate interest in the assets belonging to the applicable class of the
Fund. All expenses of a Fund are borne at the same rate by each class of
shares, except that fees under Administration and Service Plans are borne
exclusively by Administration and Service Shares, fees under Distribution and
Authorized Dealer Service Plans are borne exclusively by Class A Shares or Class
B Shares and transfer agency fees are borne at different rates by Class A Shares
or Class B Shares than Institutional, Administration and Service Shares. The
Trustees may determine in the future that it is appropriate to allocate other
expenses differently between classes of shares and may do so to the extent
consistent with the rules of the SEC and positions of the Internal Revenue
Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. Currently,
shares of a class may only be exchanged for shares of the same or an equivalent
class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain
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<PAGE>
other financial services firms that have sales arrangements with Goldman Sachs.
Class B shares bear the cost of distribution (Rule 12b-1) fees at the aggregate
rate of up to 0.75% of the average daily net assets attributable to Class B
shares. Class B shares also bear the cost of an Authorized Dealer Service Plan
at an annual rate of up to 0.25% of the average daily net assets attributable to
Class B shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Dividends paid by
each Fund, if any, with respect to each class of shares will be calculated in
the same manner, at the same time on the same day and will be in the same
amount, except for differences caused by the fact that the respective account
administration, service, authorized dealer service plan and distribution fees
relating to a particular class will be borne exclusively by that class.
Similarly, the net asset value per share may differ depending upon the class of
shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of April 1, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Security Bank of Idaho, FBO Idaho Housing Agency, P.O. Box
30007, Salt Lake City, UT (6.30%); First Trust of New York, N.A., Mr. Sean
Cullen, 100 Wall Street, Suite 1600, New York, NY (11.71%); Foundation for New
ERA Philanthropy, Arlin M. Adams, Trustee, 1600 Market Street, 36th Floor,
Philadelphia, PA 19102 (8.88%); Fundex Corporation, Attn: Mr. Mitsuru Hashimoto,
1875 S. Grant Street, Suite 1000, San Mateo, CA 94402-2671 (12.40%); State
Treasurer/Nebraska Investment Council, Attn: Gayle Ducker, 941 "O" Street,
Lincoln, NE 68508 (6.75%); Short Duration Government Fund -- Berko Accounts, 150
East 69th Street, New York, NY 10021-5704 (5.57%); Central Carolina Bank & Trust
Co., Mr. Norwood Thomas, Jr., Senior V.P. & T.O., P.O. Box 931, Durham, NC 27702
(7.49%); Norwest Bank Iowa NA, c/o Norwest Bank Minnesota NA, Attn: Betty
Gunderson, P.O. Box 1450 NW 6477, Minneapolis, MN 55400-1450 (7.26%); Richfield
Bank & Trust Co., Kirchbak Co., Attn: Judith A. Ferguson, 6625 Lyndale Avenue
South, Richfield, MN 55423 (12.48%); State Street Bank & Trust Co., Rena
Williams, P.O. Box 1992, Boston, MA 02105-992 (34.05%); Short Duration Tax-Free
Fund -- Donald R. Gant, Partner, Goldman, Sachs
B-81
<PAGE>
& Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.63%); First
Interstate BK - Agent/Amer NB, Stratosphere Corp. Inden 3/9/95, Attn: Rose Robb,
3800 Howard Hughes Parkway, Las Vegas, NV 89193-8588 (8.12%); G-K-G, Inc.,
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (9.23%); Indiana
Trust & Investment Management Co., Attn: Tina Taylor, 3930 Edison Lakes Parkway,
Suite 250, Mishawaka, IN 46545 (9.69%); Nelda Start, Attn: Mr. Walte Riedel,
P.O. Box 903, Orange, TX 77631-0909 (6.80%); Robert A. Cenci, Trust Trustee, GS
Profit Sharing Master Trust, Attn: Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992 (16.08%); First National Bank of North Dakota, Attn: Josie Wahl, P.O.
Box 6001, Grand Forks, ND 58206-6001 (5.76%); Government Income Fund -Frontier
Trust Co. Inc. TR, FBO Dade County Public School, Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-
5547 (9.52%); Charles Machine Works, Inc., ESOP & Trust Asset Allocation
Account, Mike Stodola, Trustee, P.O. Box 66, 1959 West Fir Street, Perry, OK
73077-5803 (7.42%); Bob Smith MD Foundation, 3811 Turtle Creek Centre #2150,
Dallas, TX 75219-4454 (6.60%); Core Fund -- Local 234 Electric Workers
Retirement Fund, Attn: Ronald D. Carpenter, 10300 Merritt Street, Castroville,
CA 95012 (7.20%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
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in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
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The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by
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reason or willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent unaffiliated broker identified by the portfolio manager/trader and
contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on
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the National Association of Securities Dealers Automated Quotations System
("NASDAQ") will be valued at the last sale price on the exchange or system in
which they are principally traded, on the valuation date. If there is no sale on
the valuation day, securities traded principally: (i) on a U.S. exchange or
NASDAQ will be valued at the mean between the closing bid and asked prices, and
(ii) on a foreign exchange will be valued at the official bid price. The last
sale price and official bid price for securities traded principally on a foreign
exchange will be determined as of the close of the London Foreign Exchange; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked prices; (c) options and futures contracts will be valued at the
last sale price in the market where such contract is principally traded; and (d)
forward foreign currency exchange contracts will be valued at the mean between
the last bid and asked quotations supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
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insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In
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addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's or Global Income
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward contracts for
purposes other than hedging currency risk with respect to securities in Core
Fund's or Global Income Fund's portfolio or anticipated to be acquired may not
qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of
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securities or other sources. If for any taxable year a Fund does not qualify as
a regulated investment company, it will be taxed on all of its investment
company taxable income and net capital gain at corporate rates, its net tax-
exempt interest (if any) may be subject to the alternative minimum tax, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby
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commitment." The Tax Exempt Funds may pay for a standby commitment either
separately, in cash, or in the form of a higher price for the securities which
are acquired subject to the standby commitment, thus increasing the cost of
securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging
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transactions entered into by a Fund, that Fund may be required to defer the
recognition of losses on futures or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
related positions held by the Fund and the characterization of gains or losses
as long-term or short-term may be changed. The short-short test described above
may limit each Fund's ability to use options, futures and forward transactions
as well as its ability to engage in short sales. The tax provisions described
above applicable to options, futures and forward contracts may affect the
amount, timing, and character of a Fund's distributions to shareholders. Certain
tax elections may be available to the Funds to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may
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not make this election for any particular taxable year. Core Fund will not
satisfy the 50% requirement described above and, therefore, will not make this
election. Core Fund and, if it does not make the election, Global Income Fund
will, however, be entitled to deduct such taxes in computing the amounts they
are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such
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companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core, Global Income or High Yield Funds is
timely distributed to its shareholders. Core, Global Income or High Yield Funds
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require Core, Global Income or
High Yield Funds to recognize taxable income or gain without the concurrent
receipt of cash. Core, Global Income or High Yield Funds may limit and/or manage
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex
B-93
<PAGE>
requirements that must be satisfied on a continuing basis in order for bonds to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed
facility fails to comply with such requirements at any time, interest on the
bond could become taxable, retroactive to the date the obligation was issued. In
that event, a portion of a Tax Exempt Fund's distributions attributable to
interest the Fund received on such bond for the current year and for prior years
could be characterized or recharacterized as taxable income. The availability of
tax-exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the applicable
requirements, dividends paid by the Fund which are attributable to tax exempt
interest on Municipal Securities and designated by the Fund as exempt-interest
dividends in a written notice mailed to its shareholders within sixty days after
the close of its taxable year may be treated by shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code.
Exempt-interest dividends a Tax Exempt Fund receives from other regulated
investment companies, including exempt-interest dividends on auction rate
preferred securities of such companies held by a Fund, are treated as interest
on Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond
B-94
<PAGE>
interest, recognized market discount income, original issue discount income
accrued with respect to taxable bonds, income from repurchase agreements, income
from securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash
B-95
<PAGE>
and will have a cost basis in the shares received equal to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a
B-96
<PAGE>
tax preference item a percentage of distributions which is not equal to the
actual amount of tax-exempt income or tax preference item income earned by Short
Duration Tax-Free Fund or Municipal Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment
B-97
<PAGE>
company taxable income distributed by a Fund to a shareholder who is not a U.S.
person will be subject to U.S. withholding tax at the rate of 30% (or a lower
rate provided by an applicable tax treaty) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a shareholder who is not a U.S. person will not
be subject to U.S. federal income or withholding tax unless the distributions
are effectively connected with the shareholder's trade or business in the United
States or, in the case of a shareholder who is a nonresident alien individual,
the shareholder is present in the United States for 183 days or more during the
taxable year and certain other conditions are met. Non-U.S. shareholders may
also be subject to U.S. withholding tax on deemed income resulting from any
election by Global Income Fund to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
B-98
<PAGE>
PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
B-99
<PAGE>
Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class A
or Class B Shares which is based upon a Fund's net asset value per share would
be reduced if a sales charge were taken into account.
B-100
<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- ---- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
B-101
<PAGE>
DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ----------- ----------- ------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ---------- -------------- --------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12, 1995.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced operations
on February 28, 1996. Service Shares of Short Duration Government Fund
commenced operations on April 10, 1996. An aggregate total return (not
annualized) is shown instead of an average annual total return since
Administration and Service Shares have not completed a full 12 months of
operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February 28,
1996. Service Shares of Core Fund commenced operations on March 13, 1996. An
aggregate total return (not annualized) is shown instead of an average
annual total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5%
of the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
5f No Service Shares of Global Income Fund were outstanding during the periods
indicated.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1, 1996.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to time
advertise their performance relative to certain indices, any components of such
indices and benchmark investments, including but not limited to: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund
Report (which provides industry averages for 7-day annualized and compounded
yields of taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and the
characteristics of a Fund's benchmark investments are not identical to, and in
some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-
B-111
<PAGE>
day period for any one shareholder. Each Fund, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of each
respective Fund at the time of redemption by a distribution in kind of
securities (instead of cash) from such Fund. The securities distributed in kind
would be readily marketable and would be valued for this purpose using the same
method employed in calculating each Fund's net asset value per share. See "Net
Asset Value." If a shareholder receives redemption proceeds in kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1996
Annual Report are hereby incorporated by reference and attached hereto. A copy
of the annual reports may be obtained without charge by writing Goldman, Sachs &
Co., 4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs &
Co., at the telephone number on the back cover of each Fund's Prospectus.
B-112
<PAGE>
SERVICE PLAN
Each Fund has adopted a service plan (the "Plan") with respect to its
Service Shares which authorizes it to compensate Service Organizations for
providing certain administration services and personal and account maintenance
services to their customers who are or may become beneficial owners of such
Shares. Pursuant to the Plan, a Fund will enter into agreements with Service
Organizations which purchase Service Shares of the Fund on behalf of their
customers ("Service Agreements"). Under such Service Agreements the Service
Organizations may perform some or all of the following services: (a) act,
directly or through an agent, as the sole shareholder of record and nominee for
all customers, (b) maintain account records for each customer who beneficially
owns Service Shares of a Fund, (c) answer questions and handle correspondence
from customers regarding their accounts, (d) process customer orders to
purchase, redeem and exchange Service Shares of a Fund, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in shares by customers, (f)
provide facilities to answer questions from prospective and existing investors
about Service Shares of a Fund, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization and (j) act as liaison between customers and a Fund, including
obtaining information from a Fund, working with a Fund to correct errors and
resolve problems and providing statistical and other information to a Fund. As
compensation for such services, a Fund will pay each Service Organization a
service fee in an amount up to 0.50% (on an annualized basis) of the average
daily net assets of the Service Shares of such Fund attributable to or held in
the name of such Service Organization; provided, however, that the fee paid for
personal and account maintenance services shall not exceed 0.25% such average
daily net assets. For the fiscal years ended October 31, 1996, October 31, 1995
and October 31, 1994, service fees were paid by the Funds as follows:
B-113
<PAGE>
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- -------------------------------- ------ ------ ------
<S> <C> <C> <C>
Adjustable Rate Fund /(1)/ /(1)/ /(1)/
Short Duration Government Fund $1,222 /(2)/ /(2)/
Short Duration Tax-Free Fund $2,322 $1,797 $ 325
Core Fund $ 422 /(3)/ /(3)/
Global Income Fund /(4)/ /(4)/ /(4)/
</TABLE>
- ----------
/(1)/ No Service Shares of Adjustable Rate Fund were outstanding at October 31,
1996, 1995 and 1994.
/(2)/ No Service Shares of Short Duration Government Fund were outstanding at
October 31, 1995 and 1994.
/(3)/ No Service Shares of Core Fund were outstanding at October 31, 1995 and
1994.
/(4)/ No Service Shares of Global Income Fund were outstanding at October 31,
1996, 1995 and 1994.
Each Fund has adopted its Plan pursuant to Rule 12b-1 under the 1940 Act in
order to avoid any possibility that payments to the Service Organizations
pursuant to the Service Agreements might violate the 1940 Act. Rule 12b-1,
which was adopted by the SEC under the Act, regulates the circumstances under
which an investment company or series thereof may bear expenses associated with
the distribution of its shares. In particular, such an investment company or
series thereof cannot engage directly or indirectly in financing any activity
which is primarily intended to result in the sale of shares issued by the
company unless it has adopted a plan pursuant to, and complies with the other
requirements of, such Rule. The Trust believes that fees paid for the services
provided in the Plan and described above are not expenses incurred primarily for
effecting the distribution of Service Shares. However, should such payments be
deemed by a court or the SEC to be distribution expenses, such payments would be
duly authorized by the Plan.
The Glass-Steagall Act prohibits all entities which receive deposits from
engaging to any extent in the business of issuing, underwriting, selling or
distribution securities, although institutions such as national banks are
permitted to purchase and sell securities upon the order and for the account of
their customers. In addition, under some state securities laws, banks and other
financial institutions purchasing Service Shares on behalf of their customers
may be required to register as dealers. Should future legislative or
administrative action or judicial or administrative decisions or interpretations
prohibit or restrict the activities of one or more of the Service Organizations
in connection with the Funds, such Service Organizations might be required to
alter materially or discontinue the services performed under their Service
Agreements. If one or more of the Service Organizations were restricted from
effecting purchases or sales of Service Shares automatically pursuant to pre-
authorized instructions, for example, effecting such transactions on a manual
B-114
<PAGE>
basis might affect the size and/or growth of a Fund. Any such alteration or
discontinuance of services could require the Board of Trustees to consider
changing a Fund's method of operations or providing alternative means of
offering Service Shares of a Fund to customers of such Service Organizations, in
which case the operation of such Fund, its size and/or its growth might be
significantly altered. It is not anticipated, however, that any alternation of
a Fund's operations would have any effect on the net asset value per share or
result in financial losses to any shareholder.
Conflict of interest restrictions (including the Employee Retirement Income
Security Act of 1974) may apply to a Service Organization's receipt of
compensation paid by a Fund in connection with the investment of fiduciary
assets in Service Shares of such Fund. Service Organizations, including banks
regulated by the Comptroller of the Currency, the Federal Reserve Board or the
Federal Deposit Insurance Corporation, and investment advisers and other money
managers subject to the jurisdiction of the SEC, the Department of Labor or
state securities regulators, are urged to consult legal advisers before
investing fiduciary assets in Service Shares of the Funds.
The Plans with respect to Adjustable Rate Fund, Short Duration Government
Fund, Short Duration Tax-Free Fund and Core Fund were approved by The Goldman
Sachs Group, L.P., as the sole shareholder of Service Shares of each Fund. The
Trustees, including a majority of the Trustees who are not interested persons of
the Trust and who have no direct or indirect financial interest in the operation
of the Plans or the related Service Agreements, most recently voted to approve
each Fund's Plan and Service Agreements at a meeting called for the purpose of
voting on such Plans and Service Agreements on April 23, 1997, including Global
and High Yield Funds. Each Plan and Service Agreement will remain in effect
until April 30, 1998 and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the Board of Trustees
in the manner described above. No Plan may be amended to increase materially
the amount to be spent for the services described therein without approval of
the Service Shareholders of the applicable Fund, and all material amendments of
each Plan must also be approved by the Board of Trustees in the manner described
above. Each Plan may be terminated at any time by a majority of the Board of
Trustees as described above or by vote of a majority of the outstanding Service
Shares of the applicable Fund. The Service Agreements may be terminated at any
time, without payment of any penalty, by vote of a majority of the Board of
Trustees as described above or by a vote of a majority of the outstanding
Service Shares of the applicable Fund on not more than sixty (60) days' written
notice to any other party to the Service Agreements. The Service Agreements
will terminate automatically if assigned. So long as the Plans are in effect,
the selection and nomination of those Trustees who are not interested persons
will be
B-115
<PAGE>
committed to the discretion of the Trust's Nominating Committee, which consists
of all of the non-interested members of the Board of Trustees. The Board of
Trustees has determined that, in its judgment, there is a reasonable likelihood
that a Fund's Plan will benefit such Fund and its holders of Service Shares. In
the Board of Trustees' quarterly review of the Plans and Service Agreements, the
Board will consider their continued appropriateness and the level of
compensation provided therein.
B-116
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
times over the future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
3-A
<PAGE>
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
4-A
<PAGE>
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by
5-A
<PAGE>
Standard & Poor's is described as having a strong degree of safety regarding
timely payment.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
6-A
<PAGE>
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating
7-A
<PAGE>
category. Plus and minus signs, however, are not used in the AAA, DDD, DD, or D
Categories.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed
to meet scheduled principal and/or interest payment.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
9-A
<PAGE>
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
CLASS A SHARES
CLASS B SHARES
GOLDMAN SACHS ADJUSTABLE RATE GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS SHORT DURATION TAX-FREE FUND
GOLDMAN SACHS MUNICIPAL INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(EACH A PORTFOLIO OF GOLDMAN SACHS TRUST)
Goldman Sachs Trust
4900 Sears Tower
Chicago, Illinois 60606
This Statement of Additional Information (the "Additional Statement") is
not a prospectus. This Additional Statement should be read in conjunction with
the prospectus for the Class A Shares and Class B Shares of Goldman Sachs
Adjustable Rate Government Fund, Goldman Sachs Short Duration Government Fund,
Goldman Sachs Short Duration Tax-Free Fund, Goldman Sachs Municipal Income Fund,
Goldman Sachs Government Income Fund, Goldman Sachs Core Fixed Income Fund,
Goldman Sachs Global Income Fund and Goldman Sachs High Yield Fund dated May 1,
1997, as amended and/or supplemented from time to time, which may be obtained
without charge from Goldman, Sachs & Co. by calling the telephone number, or
writing to one of the addresses, listed below. Goldman Sachs Adjustable Rate
Government Fund currently does not offer Class B Shares.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Introduction B-3
Other Investments and Practices B-11
Investment Restrictions B-57
Management B-60
Portfolio Transactions B-76
Shares of the Trust B-79
Net Asset Value B-85
Taxation B-86
Performance Information B-98
Other Information B-111
Financial Statements B-112
Other Information Regarding Purchases, Redemptions,
Exchanges and Dividends B-113
Distribution and Authorized Dealer Service Plans B-117
Appendix A 1-A
Appendix B 1-B
</TABLE>
The date of this Additional Statement is May 1, 1997.
<PAGE>
GOLDMAN SACHS TRUST GOLDMAN, SACHS & CO.
4900 SEARS TOWER DISTRIBUTOR
CHICAGO, ILLINOIS 60606 85 BROAD STREET
NEW YORK, NY 10004
GOLDMAN SACHS ASSET MANAGEMENT
ADVISER TO GOLDMAN SACHS MUNICIPAL
INCOME FUND
GOLDMAN SACHS GOVERNMENT INCOME FUND
GOLDMAN SACHS SHORT DURATION TAX FREE
FUND
GOLDMAN SACHS CORE FIXED INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS FUNDS GOLDMAN,SACHS & CO.
MANAGEMENT, L.P. TRANSFER AGENT
ADVISER TO GOLDMAN SACHS 4900 SEARS TOWER
ADJUSTABLE RATE GOVERNMENT FUND CHICAGO, ILLINOIS 60606
AND SHORT DURATION GOVERNMENT FUND
ONE NEW YORK PLAZA
NEW YORK, NEW YORK 10004
GOLDMAN SACHS ASSET MANAGEMENT
INTERNATIONAL
ADVISER TO GOLDMAN SACHS
GLOBAL INCOME FUND
133 PETERBOROUGH COURT
LONDON EC4A 2BB ENGLAND
TOLL FREE .......800-526-7384
<PAGE>
INTRODUCTION
Goldman Sachs Trust (the "Trust") was formed under the laws of the
state of Delaware on January 28, 1997. The Trust is a successor to a
Massachusetts business trust that was merged with the Trust on April 30, 1997.
The Trust assumed its current name on March 22, 1991. The Trustees of the Trust
have authority under the Declaration of Trust to create and classify shares into
separate series and to classify and reclassify any series of shares into one or
more classes without further action by shareholders. Pursuant thereto, the
Trustees have created the following series, among others: Goldman Sachs
Adjustable Rate Government Fund ("Adjustable Rate Fund"), Goldman Sachs Core
Fixed Income Fund ("Core Fund"), Goldman Sachs Global Income Fund ("Global
Income Fund"), Goldman Sachs Government Income Fund ("Government Income Fund"),
Goldman Sachs Municipal Income Fund ("Municipal Income Fund"), Goldman Sachs
Short Duration Tax-Free Fund ("Short Duration Tax-Free Fund"), Goldman Sachs
Short Duration Government Fund ("Short Duration Government Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") and 27 other series of shares.
Adjustable Rate Fund, Core Fund, Global Income Fund, Government Income Fund,
Municipal Income Fund, Short Duration Tax-Free Fund, Short Duration Government
Fund and High Yield Fund are each sometimes referred to herein as a "Fund" and
collectively as the "Funds." Short Duration Government Fund, Short Duration
Tax-Free Fund and Core Fund are each authorized to issue five classes of shares:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B. Shares. Adjustable Rate Fund is authorized to issue four classes of
shares: Institutional Shares, Administration Shares, Service Shares and Class A
Shares. Global Income Fund and High Yield Fund are authorized to issue four
classes of shares: Institutional Shares, Service Shares, Class A Shares and
Class B Shares. Government Income Fund and Municipal Income Fund are each
authorized to issue two classes of shares: Class A Shares and Class B Shares.
Additional series may be added in the future from time to time.
Goldman Sachs Asset Management ("GSAM"), a separate operating division
of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the investment adviser to
Core Fund, Government Income Fund, Municipal Income Fund, Short Duration Tax-
Free Fund and High Yield Fund. Goldman Sachs Asset Management International
("GSAMI"), an affiliate of Goldman Sachs, serves as investment adviser to the
Global Income Fund. Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate
of Goldman Sachs, serves as the investment adviser to Adjustable Rate Fund and
Short Duration Government Fund. GSAM, GSAMI and GSFM are each sometimes
referred to herein as the "Adviser" and collectively herein as the "Advisers."
In addition, Goldman Sachs serves as each Fund's distributor and transfer agent.
Each Fund's custodian is State Street Bank and Trust Company.
Because each Fund's shares may be redeemed upon request of a
shareholder on any business day at net asset value, the Funds offer greater
liquidity than many competing investments, such as certificates of deposit and
direct investments in certain
B-3
<PAGE>
securities in which the respective Fund may invest. However, unlike
certificates of deposits, shares of the Funds are not insured by the Federal
Deposit Insurance Corporation.
The following information relates to and supplements the description of
each Fund's investment policies contained in the Prospectus. See the Prospectus
for a fuller description of each Fund's investment objective and policies.
Investing in the Funds entails certain risks and there is no assurance that a
Fund will achieve its objective.
EXPERIENCED MANAGEMENT. Successfully creating and managing a
----------------------
diversified portfolio of securities requires professionals with extensive
experience. Goldman Sachs' highly skilled portfolio management team brings
together many years of experience in the analysis, valuation and trading of U.S.
and foreign fixed-income securities.
ADJUSTABLE RATE FUND AND SHORT DURATION GOVERNMENT FUND
Adjustable Rate Fund and Short Duration Government Fund are both
designed for investors who seek a high level of high current income, relative
stability of principal and the high credit quality of securities issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
sponsored enterprises, without incurring the administrative and accounting
burdens involved in direct investment.
Market and economic conditions may affect the investments of Adjustable
Rate Fund and Short Duration Government Fund differently than the investments
normally purchased by such investors. Relative to U.S. Treasury and non-
fluctuating money market instruments, the market value of adjustable rate
mortgage securities in which Adjustable Rate and Short Duration Government Funds
may invest may be adversely affected by increases in market interest rates.
Conversely, decreases in market interest rates may result in less capital
appreciation for adjustable rate mortgage securities in relation to U.S.
Treasury and money market investments.
HIGH CURRENT INCOME. Adjustable Rate and Short Duration Government
-------------------
Funds seek a higher current yield than a money market fund or than that offered
by bank certificates of deposit and money market accounts. However, the
Adjustable Rate and Short Duration Government Funds do not maintain a constant
net asset value per share and are subject to greater fluctuations in the value
of their shares than a money market fund. Unlike bank certificates of deposit
and money market accounts, investments in shares of the Funds are not insured or
guaranteed by any government agency. Each of the Adjustable Rate and Short
Duration Government Funds seeks to provide such high current income without
sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. Adjustable Rate Fund seeks to
-------------------------------------
minimize net asset value fluctuations by investing
B-4
<PAGE>
primarily in adjustable rate mortgage pass-through securities and other mortgage
securities with periodic interest rate resets, maintaining a maximum duration of
two years and a target duration equal to that of a six-month to one-year U.S.
Treasury security, and utilizing certain active management techniques to seek to
hedge interest rate risk. Short Duration Government Fund seeks to minimize net
asset value fluctuations by utilizing certain interest rate hedging techniques
and by maintaining a maximum duration of not more than three years. The
duration target of the Short Duration Government Fund is that of the 2-year U.S.
Treasury Security plus or minus .5 years. There is no assurance that these
strategies for the Adjustable Rate Fund and Short Duration Government Fund will
always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team bring together many years of experience in the
analysis, valuation and trading of U.S. fixed-income securities.
GOVERNMENT INCOME FUND
Government Income Fund is designed for investors who seek the
relatively high current income, relative safety of principal and the high credit
quality of securities issued by the U.S. government or its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and account burdens involved in direct investment.
Government Income Fund's overall returns are generally likely to move
in the same direction as interest rates. Therefore, when interest rates
decline, Government Income Fund's return is also likely to decline. In exchange
for accepting a higher degree of share price fluctuation, investors have the
potential to achieve a higher return from the Government Income Fund than from
shorter-term investments.
High Current Income. Government Income Fund is designed to have a
-------------------
higher current yield than a money market fund, since it can invest in longer-
term, higher yielding securities, and may utilize certain investment techniques
not available to a money market fund. Similarly, Government Income Fund's yield
is expected to exceed that offered by bank certificates of deposit and money
market accounts. However, Government Income Fund does not maintain a constant
net asset value per share and is subject to greater fluctuation in the value of
its shares than a money market fund. Unlike bank certificates of deposit and
money market accounts, investments in shares of Government Income Fund are not
insured or guaranteed by any government agency. Government Income Fund seeks
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to provide high current income without, however, sacrificing credit quality.
Liquidity. Because Government Income Fund's shares may be redeemed upon
---------
request of a shareholder on any business day at net asset value, Government
Income Fund offers greater liquidity than many competing investments such as
certificates of deposit and direct investments in certain securities in which
Government Income Fund may invest.
A Sophisticated Investment Process. Government Income Fund's
----------------------------------
investment process starts with a review of trends for the overall economy as
well as for different sectors of the U.S. government and mortgage-backed
securities markets. Goldman Sachs' portfolio managers then analyze yield
spreads, implied volatility and the shape of the yield curve. In planning the
Government Income Fund's portfolio investment strategies, the Adviser is able to
draw upon the economic and fixed-income research resources of Goldman Sachs.
The Adviser will use a sophisticated analytical process involving Goldman Sachs'
proprietary mortgage prepayment model and option-adjusted spread model to
structure and maintain the Government Income Fund's investment portfolio. In
determining the Government Income Fund's investment strategy and making market
timing decisions, the Adviser will have access to information from Goldman
Sachs' economists, fixed-income analysts and mortgage specialists.
Convenience of a Fund Structure. Government Income Fund eliminates
-------------------------------
many of the complications that direct ownership of U.S. government and mortgage-
backed securities entails. Government Income Fund automatically reinvests all
principal payments within the Fund and distributes only current income each
month, thereby conserving principal and eliminating the investor's need to
segregate and reinvest the principal portion of each payment on his own.
SHORT DURATION TAX-FREE AND MUNICIPAL INCOME FUNDS
Short Duration Tax-Free Fund and Municipal Income Fund (the "Tax Exempt
Funds") are not money market funds. Each is designed for investors who seek the
tax benefits associated with investing in municipal securities and who are able
to accept greater risk with the possibility of higher returns than investors in
municipal money market funds. While municipal money market funds almost always
maintain a constant net asset value, they must meet stringent high quality
credit standards, their portfolios must be broadly diversified and their
portfolio securities must have remaining maturities of 397 days or less. An
example of an "eligible" investment for the Tax Exempt Funds is auction rate
municipal securities, which generally have higher yields than money market
municipal securities, but which typically are not eligible investments for
municipal money market funds.
In addition, unlike a municipal money market fund, the Tax Exempt
Funds' increased investment flexibility permits their portfolios to be more
easily adjusted to reflect the shape of the
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current yield curve as well as to respond to anticipated developments that might
affect the shape of the yield curve.
Investors who wish to invest in municipal securities may find that a
mutual fund structure offers some important advantages when compared to
investing in individual municipal securities, including:
. The ratings given to municipal securities by the rating
organizations are difficult to evaluate. For example, some
municipal securities with relatively low credit ratings have yields
comparable to municipal securities with much higher ratings. The
credit research professionals at Goldman Sachs closely follow
market events and are well positioned to judge current and expected
credit conditions of municipal issuers;
. Because of the relative inefficiency of the secondary market in
municipal securities, the value of an individual municipal security
is often difficult to determine. As such, investors may obtain a
wide range of different prices when asking for quotes from
different dealers. In addition, a dealer may have a large
inventory of a particular issue that it wants to reduce.
Obtaining the best overall prices can require extensive
negotiation, which is a function performed by the portfolio
manager;
. Market expertise is also an important consideration for municipal
investors, and because the Tax Exempt Funds take relatively large
positions in different securities, the Tax Exempt Funds may be able
to obtain more favorable prices in the municipal securities market
than investors with relatively small positions; and
. Industry and geographical diversification are important
considerations for municipal investors. The Tax Exempt Funds are
designed to provide this diversification.
CORE FUND
Core Fund is designed for investors seeking a total return consisting
of both income and capital appreciation that exceeds the total return of the
Lehman Brothers Aggregate Bond Index, without incurring the administrative and
accounting burdens involved in direct investment. Such investors also prefer
liquidity, experienced professional management and administration, a
sophisticated investment process, and the convenience of a mutual fund
structure. Core Fund may be appropriate as part of a balanced investment
strategy consisting of stocks, bonds and cash or as a complement to positions in
other types of fixed-income investments.
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Core Fund's overall returns are generally likely to move in the
opposite direction from interest rates. Therefore, when interest rates decline,
Core Fund's return is likely to increase. Conversely, when interest rates
increase, Core Fund's return is likely to decline. However, the Adviser
believes that, given the flexibility of managers to invest in a diversified
portfolio of securities, Core Fund's return is not likely to decline as quickly
as that of other fixed-income funds with a comparable average portfolio
duration. In exchange for accepting a higher degree of potential share price
fluctuation, investors have the opportunity to achieve a higher return from Core
Fund than from shorter-term investments.
A number of investment strategies will be used to achieve the Core
Fund's investment objective, including market sector selection, determination of
yield curve exposure, and issuer selection. In addition, the Adviser will
attempt to take advantage of pricing inefficiencies in the fixed-income markets.
Market sector selection is the underweighting or overweighting of one or more of
the five market sectors (i.e., U.S. Treasuries, U.S. government agencies,
corporate securities, mortgage-backed securities and asset-backed securities) in
which the Fund primarily invests. The decision to overweight or underweight a
given market sector is based on expectations of future yield spreads between
different sectors. Yield curve exposure strategy consists of overweighting or
underweighting different maturity sectors to take advantage of the shape of the
yield curve. Issuer selection is the purchase and sale of corporate securities
based on a corporation's current and expected credit standing. To take
advantage of price discrepancies between securities resulting from supply and
demand imbalances or other technical factors, the Fund may simultaneously
purchase and sell comparable, but not identical, securities. The Adviser will
have access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
A SOPHISTICATED INVESTMENT PROCESS. Core Fund will attempt to control
----------------------------------
its exposure to interest rate risk, including overall market exposure and the
spread risk of particular sectors and securities, through active portfolio
management techniques. Core Fund's investment process starts with a review of
trends for the overall economy as well as for different sectors of the fixed-
income securities markets. Goldman Sachs' portfolio managers then analyze
yield spreads, implied volatility and the shape of the yield curve. In planning
Core Fund's portfolio investment strategies, the Adviser is able to draw upon
the economic and fixed-income research resources of Goldman Sachs. The Adviser
will use a sophisticated analytical process including Goldman Sachs' proprietary
mortgage prepayment model and option-adjusted spread model to assist in
structuring and maintaining Core Fund's investment portfolio. In determining
Core Fund's investment strategy and making market timing decisions, the Adviser
will have
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access to input from Goldman Sachs' economists, fixed-income analysts and
mortgage specialists.
GLOBAL INCOME FUND
Global Income Fund is designed for investors seeking a combination of
high income, capital appreciation, stability of principal, experienced
professional management, flexibility and liquidity. However, investing in the
Fund involves certain risks and there is no assurance that the Fund will achieve
its investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation, and political climate. The portfolio managers apply the
Black-Litterman Model (the "Model") to their views to develop a portfolio that
produces, in the view of the Adviser, the optimal expected return for a given
level of risk. The Model factors in the opinions of the portfolio managers,
adjusting for their level of confidence in such opinions, with the views implied
by an international capital asset pricing formula. The Model is also used to
maintain the level of portfolio risk within the guidelines established by the
Adviser.
High Income. Global Income Fund's portfolio managers will seek out
-----------
the highest yielding bonds in the global fixed-income market that meet the
Global Income Fund's credit quality standards and certain other criteria.
Capital Appreciation. Investing in the foreign bond markets offers
--------------------
the potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
Portfolio Management Flexibility. Global Income Fund is actively
--------------------------------
managed. The Fund's portfolio managers invest in countries that, in their
judgment, meet the Fund's investment guidelines and often have strong currencies
and stable economies and in securities that they believe offer favorable
performance prospects.
Relative Stability of Principal. Global Income Fund may be able to
-------------------------------
reduce principal fluctuation by investing in foreign countries with economic
policies or business cycles different from
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those of the United States and in foreign securities markets that do not
necessarily move in the same direction or magnitude as the U.S. market.
Investing in a broad range of U.S. and foreign fixed-income securities and
currencies reduces the dependence of the Fund's performance on developments in
any particular market to the extent that adverse events in one market are offset
by favorable events in other markets. The Fund's policy of investing primarily
in high quality securities may also reduce principal fluctuation. However,
there is no assurance that these strategies will always be successful.
Professional Management. Individual U.S. investors may prefer
-----------------------
professional management of their global bond and currency portfolios because a
well-diversified portfolio requires a large amount of capital and because the
size of the global market requires access to extensive resources and a
substantial commitment of time.
HIGH YIELD FUND
High Yield Fund's Investment Process. GSAM starts the investment
-------------------------------------
process with economic analysis based on research generated by the Goldman Sachs
Global Economic Research Group and others to determine broad growth trends,
industry-specific events and market forecasts. The market value of non-
investment grade fixed income securities tends to reflect individual
developments within a company to a greater extent than higher rated corporate
debt or Treasury bonds that react primarily to fluctuations in interest rates.
Therefore, determining the creditworthiness of issuers is critical. To that
end, the High Yield Fund's portfolio managers have access to Goldman, Sachs &
Co.'s highly regarded Credit Research and Global Investment Research
Departments, as well as analysis from the firm's High Yield Research Group, a
dedicated group of 14 professionals in the high yield and emerging market
corporate bond research area, consisting of industry and regional market
specialists. In addition, the Fund's portfolio managers may review the opinions
of the two largest independent credit rating agencies, Standard & Poor's Ratings
Group and Moody's Investors Services, Inc. High Yield Fund's portfolio managers
and credit analysts also conduct their own in-depth analysis of each issue
considered for inclusion in the Fund's portfolio. The portfolio managers and
credit analysts evaluate such factors as a company's competitive position, the
strength of its balance sheet, its ability to withstand economic downturns and
its potential to generate ample cash flow to service its debt. The ability to
accurately analyze a company's future cash flow by correctly anticipating the
impact of economic, industry-wide and specific events are critical to successful
high yield investing. GSAM's goal is to identify companies with the potential
to strengthen their balance sheets by increasing their earnings, reducing their
debt or effecting a turnaround. GSAM analyzes trends in a company's debt
picture (i.e., the level of its interest coverage) as well as new developments
in its capital structure on an ongoing basis. GSAM believes that this constant
reassessment is more
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valuable than relying on a "snapshot" view of a company's ability to service
debt at one or two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
Return on and Risks of High Yield Securities. Over the past decade,
---------------------------------------------
high yield bonds have delivered consistently higher yields and total return (and
higher volatility) than either investment grade corporate bonds or U.S. Treasury
bonds. However, because these non-investment grade securities involve higher
risks in return for higher income, they are best suited to long-term investors
who are financially secure enough to withstand volatility and the risks
associated with such investments. See "Other Investments and Practices."
Different types of fixed income securities may react differently to changes in
the economy. High yield bonds, like stocks, tend to perform best when the
economy is strong, inflation is low and companies experience healthy profits,
which can lead to higher stock prices and higher credit ratings. Government
bonds are likely to appreciate more in a weaker economy when interest rates are
declining. In certain types of markets, adding some diversification in the high
yield asset class may help to increase returns and decrease overall portfolio
risk.
For high yield, non-investment grade securities, as for most
investments, there is a direct relationship between risk and return. Along with
their potential to deliver higher yields and greater capital appreciation than
most other types of fixed income securities, high yield securities are subject
to higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
OTHER INVESTMENTS AND PRACTICES
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
ENTERPRISES
Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as
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Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance) are supported by the full faith and credit of
the United States of America. Others, such as obligations issued or guaranteed
by U.S. government agencies, instrumentalities or sponsored enterprises, are
supported either by (a) the full faith and credit of the U.S. government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of Federal Home Loan Banks), (c)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (d) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
CUSTODIAL RECEIPTS
Each Fund may acquire custodial receipts in respect of U.S. Government
Securities. Such custodial receipts evidence ownership of future interest
payments, principal payments or both on certain notes or bonds. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATS"). For certain securities law purposes, custodial receipts
are not considered U.S. Government Securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
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Adjustable Rate, Short Duration Government, Core, Global Income, High
Yield and Government Income Funds (collectively, the "Taxable Funds") may each
invest in mortgage loans and mortgage pass-through securities and other
securities representing an interest in or collateralized by adjustable and
fixed-rate mortgage loans ("Mortgage-Backed Securities").
GENERAL CHARACTERISTICS. Each mortgage pool underlying Mortgage-
-----------------------
Backed Securities consists of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied one-
unit to four-unit residential properties, multi-family (i.e., five or more)
properties, agriculture properties, commercial properties and mixed use
properties (the "Mortgaged Properties"). The Mortgaged Properties may consist
of detached individual dwelling units, multi-family dwelling units, individual
condominiums, townhouses, duplexes, triplexes, fourplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
The Mortgaged Properties may also include residential investment properties and
second homes.
The investment characteristics of adjustable and fixed rate Mortgage-
Backed Securities differ from those of traditional fixed-income securities. The
major differences include the payment of interest and principal on Mortgage-
Backed Securities on a more frequent (usually monthly) schedule, and the
possibility that principal may be prepaid at any time due to prepayments on the
underlying mortgage loans or other assets. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed-income securities. As a result, a faster than expected
prepayment rate will reduce both the market value and the yield to maturity from
those which were anticipated. A prepayment rate that is slower than expected
will have the opposite effect of increasing yield to maturity and market value.
To the extent that the Funds invest in Mortgage-Backed Securities, the Advisers
will seek to manage these potential risks by investing in a variety of Mortgage-
Backed Securities and by using certain hedging techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a
---------------------------------------
fixed initial mortgage interest rate for a specified period of time.
Thereafter, the interest rates (the "Mortgage Interest Rates") may be subject to
periodic adjustment based on changes in the applicable index rate (the "Index
Rate"). The adjusted rate would be equal to the Index Rate plus a fixed
percentage spread over the Index Rate established for each ARM at the time of
its origination.
Adjustable interest rates can cause payment increases that some
mortgagors may find difficult to make. However, certain ARMs may provide that
the Mortgage Interest Rate may not be adjusted to a rate above an applicable
lifetime maximum rate or below an applicable lifetime minimum rate for such ARM.
Certain ARMs may also be subject to limitations on the maximum amount by which
the
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Mortgage Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments protect borrowers from unlimited interest rate
and payment increases.
There are two main categories of indices which provide the basis for
rate adjustments on ARMs: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year,
three-year and five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term
Treasury securities, the 11th District Federal Home Loan Bank Cost of Funds, the
National Median Cost of Funds, the one-month, three-month, six-month or one-year
London Interbank Offered Rate, the prime rate of a specific bank or commercial
paper rates. Some indices, such as the one-year constant maturity Treasury
rate, closely mirror changes in market interest rate levels. Others, such as
the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels and tend to be somewhat less volatile. The degree
of volatility in the market value of each Taxable Fund's portfolio and therefore
in the net asset value of each Taxable Fund's shares will be a function of the
length of the interest rate reset periods and the degree of volatility in the
applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans
-------------------------
included in a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-Rate Mortgage Loans generally provide for monthly payments
of principal and interest in substantially equal installments for the term of
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the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion
--------------------------------------
of certain legal and regulatory aspects of the mortgage loans in which the
Taxable Funds may invest. These regulations may impair the ability of a
mortgage lender to enforce its rights under the mortgage documents. These
regulations may adversely affect the Funds' investments in Mortgage-Backed
Securities (including those issued or guaranteed by the U.S. government, its
agencies or instrumentalities) by delaying the Funds' receipt of payments
derived from principal or interest on mortgage loans affected by such
regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate proceeds of the sale of foreclosed property may not equal the
amounts owed on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the
likelihood of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage
--------------------
loan, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property, which right may diminish the
mortgagee's ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage
loan, including a payment default. The court in certain instances may
also reduce the monthly payments due under such mortgage loan, change the
rate of interest, reduce the principal balance of the loan to the then-
current appraised value of the related mortgaged property, alter the
mortgage loan repayment schedule and grant priority of certain liens over
the lien of the mortgage loan. If a court relieves a borrower's obligation
to repay amounts otherwise due on a mortgage loan, the mortgage loan
servicer will not be required to advance such amounts, and any loss may be
borne by the holders of securities backed by such loans. In addition,
numerous federal and state consumer protection laws impose
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penalties for failure to comply with specific requirements in connection
with origination and servicing of mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
------------------------
called "due-on-sale" clause permitting acceleration of the maturity of the
mortgage loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-
sale" clause or the lack of such a clause in mortgage loan documents may
result in a mortgage loan being assumed by a purchaser of the property that
bears an interest rate below the current market rate.
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
------------------------------------------------
of guaranteed Mortgage-Backed Securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), other collateralized mortgage obligations and stripped
Mortgage-Backed Securities. The Taxable Funds are permitted to invest in other
types of Mortgage-Backed Securities that may be available in the future to the
extent consistent with their respective investment policies and objectives.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
-----------------------
instrumentality of the United States authorized to guarantee the timely payment
of the principal of and interest on certificates that are based on and backed
by a pool of mortgage loans insured by the Federal Housing Administration ("FHA
Loans"), or guaranteed by the Veterans Administration ("VA Loans"), or by pools
of other eligible mortgage loans. In order to meet its obligations, Ginnie Mae
is authorized to borrow from the U.S. Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
-----------------------
chartered under an act of the U.S. Congress. Each Fannie Mae Certificate is
issued and guaranteed by Fannie Mae and represents an undivided interest in a
pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool consists of
residential mortgage loans ("Mortgage Loans") either previously owned by Fannie
Mae or purchased by it in connection with the formation of the Pool. The
Mortgage Loans may be either conventional Mortgage Loans (i.e., not insured or
guaranteed by any U.S. government agency) or Mortgage Loans that are either
insured by the FHA or guaranteed by the VA. However, the Mortgage Loans in
Fannie Mae Pools are
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primarily conventional Mortgage Loans. The lenders originating and servicing
the Mortgage Loans are subject to certain eligibility requirements established
by Fannie Mae.
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Corporation ("Freddie
------------------------
Mac") is a publicly held U.S. government sponsored enterprise. The principal
activity of Freddie Mac currently is the purchase of first lien, conventional,
residential mortgage loans and participation interests in such mortgage loans
and their resale in the form of mortgage securities, primarily Freddie Mac
Certificates. A Freddie Mac Certificate represents a pro rata interest in a
group of mortgage loans or participations in mortgage loans (a "Freddie Mac
Certificate group") purchased by Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed-rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one- to four-family residential properties
or multi-family projects. Each mortgage loan must meet the applicable standards
set forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac
Certificate group may include whole loans, participation interests in whole
loans, undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying
---------------------------
the Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-
rate mortgage loans with original terms to maturity of between five and thirty
years. Substantially all of these mortgage loans are secured by first liens on
one- to four-family residential properties or multi-family projects. Each
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate
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<PAGE>
group may include whole loans, participation interests in whole loans, undivided
interests in whole loans and participations comprising another Freddie Mac
Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. The Taxable Funds may invest in
--------------------------------
government guaranteed mortgage pass-through securities ("Mortgage Pass-
Throughs"), that are fixed or adjustable rate Mortgage-Backed Securities which
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans, net of any fees or other amounts paid to
any guarantor, administrator and/or servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in one
---------------------------
or more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate mortgage loans included in a
mortgage pool may provide for deferred interest (i.e., negative amortization),
the amount of interest actually paid by a mortgagor in any month may be less
than the amount of interest accrued on the outstanding principal balance of the
related mortgage loan during the relevant period at the applicable mortgage
interest rate. In such event, the amount of interest that is treated as
deferred interest will be added to the principal balance of the related mortgage
loan and will be
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<PAGE>
distributed pro rata to certificate-holders as principal of such mortgage loan
--- ----
when paid by the mortgagor in subsequent monthly payments or at maturity.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
---------------------------------------------------------------------
OBLIGATIONS. Each Taxable Fund may invest in multiple class securities
- -----------
including collateralized mortgage obligations ("CMOs") and REMIC Certificates
issued by U.S. government agencies, instrumentalities (such as Fannie Mae) and
sponsored enterprises (such as Freddie Mac) or, in the case of Core, Global and
Government Income Funds, by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class Mortgage-Backed
Securities represent direct ownership interests in, a pool of mortgage loans or
Mortgage-Backed Securities the payments on which are used to make payments on
the CMOs or multiple class Mortgage-Backed Securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal balance of each class of REMIC
Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class Mortgage-Backed Securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed Mortgage-Backed Securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution
B-19
<PAGE>
date. Principal prepayments on the Mortgage Loans or the Mortgage Assets
underlying the CMOs or REMIC Certificates may cause some or all of the classes
of CMOs or REMIC Certificates to be retired substantially earlier than their
final scheduled distribution dates. Generally, interest is paid or accrues on
all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class certificates ("PAC Certificates"), which are parallel pay
REMIC Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes of REMIC Certificates, even
though all other principal payments and prepayments of the Mortgage Assets are
then required to be applied to one or more other classes of the Certificates.
The scheduled principal payments for the PAC Certificates generally have the
highest priority on each payment date after interest due has been paid to all
classes entitled to receive interest currently. Shortfalls, if any, are added to
the amount payable on the next payment date. The PAC Certificate payment
schedule is taken into account in calculating the final distribution date of
each class of PAC. In order to create PAC tranches, one or more tranches
generally must be created that absorb most of the volatility in the underlying
Mortgage Assets. These tranches tend to have market prices and yields that are
much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Taxable Funds may invest in
-----------------------------------
Stripped Mortgage-Backed Securities ("SMBS"), which are derivative multi-class
mortgage securities, issued or guaranteed by the U.S. government, its agencies
or instrumentalities. Core Fund, Government Income Fund and Global Fund may
also invest in
B-20
<PAGE>
privately-issued SMBS. Although the market for such securities is increasingly
liquid, privately-issued SMBS may not be readily marketable and will be
considered illiquid for purposes of each Fund's limitation on investments in
illiquid securities. The Adviser may determine that SMBS which are U.S.
Government Securities are liquid for purposes of each Fund's limitation on
investments in illiquid securities in accordance with procedures adopted by the
Board of Trustees. The market value of the class consisting entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. The yields on a class of SMBS that receives all or most of the
interest from Mortgage Assets are generally higher than prevailing market yields
on other Mortgage-Backed Securities because their cash flow patterns are more
volatile and there is a greater risk that the initial investment will not be
fully recouped.
PRIVATELY ISSUED MORTGAGE-BACKED SECURITIES
RATINGS. The ratings assigned by a rating organization to Mortgage Pass-
-------
Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two categories:
------------------
(i) liquidity protection and (ii) protection against losses resulting from
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by, among other things,
payment guarantees, letters of credit, pool insurance, subordination, or any
combination thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
-------------------------------------------------
ratings on one or more classes of Mortgage
B-21
<PAGE>
Pass-Throughs, one or more classes of certificates may be subordinate
certificates which provide that the rights of the subordinate certificate-
holders to receive any or a specified portion of distributions with respect to
the underlying mortgage loans may be subordinated to the rights of the senior
certificate-holders. If so structured, the subordination feature may be
enhanced by distributing to the senior certificate-holders on certain
distribution dates, as payment of principal, a specified percentage (which
generally declines over time) of all principal payments received during the
preceding prepayment period ("shifting interest credit enhancement"). This will
have the effect of accelerating the amortization of the senior certificates
while increasing the interest in the trust fund evidenced by the subordinate
certificates. Increasing the interest of the subordinate certificates relative
to that of the senior certificates is intended to preserve the availability of
the subordination provided by the subordinate certificates. In addition,
because the senior certificate-holders in a shifting interest credit enhancement
structure are entitled to receive a percentage of principal prepayments which is
greater than their proportionate interest in the trust fund, the rate of
principal prepayments on the mortgage loans will have an even greater effect on
the rate of principal payments and the amount of interest payments on, and the
yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior
certificate-holders to receive current distributions from the mortgage pool, a
reserve fund may be established relating to such certificates (the "Reserve
Fund"). The Reserve Fund may be created with an initial cash deposit by the
originator or servicer and augmented by the retention of distributions otherwise
available to the subordinate certificate-holders or by excess servicing fees
until the Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance
the likelihood of timely receipt by senior certificate-holders of the full
amount of scheduled monthly payments of principal and interest due to them and
will protect the senior certificate-holders against certain losses; however, in
certain circumstances the Reserve Fund could be depleted and temporary
shortfalls could result. In the event that the Reserve Fund is depleted before
the subordinated amount is reduced to zero, senior certificate-holders will
nevertheless have a preferential right to receive current distributions from the
mortgage pool to the extent of the then outstanding subordinated amount. Unless
otherwise specified, until the subordinated amount is reduced to zero, on any
distribution date any amount otherwise distributable to the subordinate
certificates or, to the extent specified, in the Reserve Fund will generally be
used to offset the amount of any losses realized with respect to the mortgage
loans ("Realized Losses"). Realized Losses remaining after application of such
amounts will generally be applied to reduce the ownership interest of the
subordinate certificates in the mortgage pool. If the subordinated amount has
been reduced to zero, Realized Losses generally will be allocated pro rata among
--- ----
all certificate-holders
B-22
<PAGE>
in proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to the
------------------------------
credit enhancement afforded by subordination, credit enhancement for Mortgage
Pass-Throughs may be provided by mortgage insurance, hazard insurance, by the
deposit of cash, certificates of deposit, letters of credit, a limited guaranty
or by such other methods as are acceptable to a rating agency. In certain
circumstances, such as where credit enhancement is provided by guarantees or a
letter of credit, the security is subject to credit risk because of its exposure
to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in payments
------------------
on the mortgage loans underlying the Mortgage Pass-Throughs, the servicer agrees
to make advances of cash for the benefit of certificate-holders, but only to the
extent that it determines such voluntary advances will be recoverable from
future payments and collections on the mortgage loans or otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
--------------------
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
ASSET-BACKED SECURITIES
Core, Government Income, High Yield and Global Income Funds may invest in
asset-backed securities. Such securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. During
periods of declining interest rates, prepayment of loans underlying asset-backed
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in such securities will be affected by reductions in the
principal amount of such securities resulting from prepayments, and its ability
to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time.
Credit card receivables are generally unsecured and the debtors on such
receivables are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to set-off
certain amounts owed on the credit cards, thereby reducing the balance due.
Automobile receivables generally are secured by automobiles rather than
residential real property. Most issuers of automobile receivables permit the
loan servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
asset-backed
B-23
<PAGE>
securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
ZERO COUPON, DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
Each Fund may invest in zero coupon bonds, deferred interest and capital
appreciation bonds and pay-in-kind ("PIK") securities. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
zero coupon, deferred interest, capital appreciation bonds and PIK securities
generally are more volatile than the market prices of interest bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest bearing securities having similar maturities and credit
quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and generally trade flat
(i.e., without accrued interest). The trading price of PIK debt securities
generally reflects the market value of the underlying debt plus an amount
representing accrued interest since the last interest payment.
Zero coupon, deferred interest, capital appreciation and PIK securities
involve the additional risk that, unlike securities that periodically pay
interest to maturity, a Fund will realize no cash until a specified future
payment date unless a portion of such securities is sold and, if the issuer of
such securities defaults, a Fund may obtain no return at all on its investment.
In addition, even though such securities do not provide for the payment of
current interest in cash, the Funds are nonetheless required to accrue income on
such investments for each taxable year and generally are required to distribute
such accrued amounts (net of deductible expenses, if any) to avoid being subject
to tax. Because no cash is generally received at the time of the accrual, a
Fund may be required to liquidate other portfolio securities to
B-24
<PAGE>
obtain sufficient cash to satisfy federal tax distribution requirements
applicable to the Fund. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
The interest rates payable on certain securities in which each Fund may
invest are not fixed and may fluctuate based upon changes in market rates. A
variable rate obligation has an interest rate which is adjusted at predesignated
periods in response to changes in the market rate of interest on which the
interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation. The absence of an unconditional
demand feature on variable and floating rate municipal securities exercisable
within seven days would, and the failure of the issuer or a third party to honor
its obligations under a demand or put feature might, require a variable or
floating rate obligation to be treated as illiquid for purposes of the Tax
Exempt Funds' limitation on illiquid investments.
Each Fund may invest in "leveraged" inverse floating rate debt instruments
("inverse floaters"), including "leveraged inverse floaters." The interest rate
on inverse floaters resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value. Accordingly, the duration of an inverse
floater may exceed its stated final maturity. Certain inverse floaters may be
deemed to be illiquid securities for purposes of each Fund's limitation on
illiquid investments.
CORPORATE DEBT OBLIGATIONS
Core, Global Income, Government Income and High Yield Funds may invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield Securities. Bonds rated BB or below by Standard & Poor's
---------------------
Ratings Group (Standard & Poor's) or Ba or below by Moody's Investor Service,
Inc. ("Moody's") (or comparable rated and unrated securities) are commonly
referred to as "junk bonds" and are considered speculative; the ability of their
issuers to make principal and interest payments may be questionable. In some
cases, such bonds may be highly speculative, have poor prospects
B-25
<PAGE>
for reaching investment grade standing and be in default. As a result,
investment in such bonds will entail greater risks than those associated with
investment grade bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and
Poor's or Aaa, Aa, A or Baa by Moody's). Analysis of the creditworthiness of
issuers of high yield securities may be more complex than for issuers of higher
quality debt securities, and the ability of a Fund to achieve its investment
objective may, to the extent of its investments in high yield securities, be
more dependent upon such creditworthiness analysis than would be the case if the
Fund were investing in higher quality securities. See Appendix B for a
description of the corporate bond and preferred stock ratings by Standard &
Poor's, Moody's, Fitch Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tends to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These non-
investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the junk bond
market and investor perceptions regarding lower-rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which High Yield Fund
invests, the yields and prices of such securities may tend to fluctuate more
than those for higher-rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities
market, resulting in greater yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income
B-26
<PAGE>
securities fluctuate in response to the general level of interest rates.
Fluctuations in the prices of portfolio securities subsequent to their
acquisition will not affect cash income from such securities but will be
reflected in the High Yield Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by the High Yield Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest continue in respect of such securities. Even if such
securities are held to maturity, recovery by the High Yield Fund of its initial
investment and any anticipated income or appreciation is uncertain. The High
Yield Fund may be required to liquidate other portfolio securities to satisfy
the High Yield Fund's annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
the High Yield Fund has not received any cash payments of such interest.
The secondary market for high yield, fixed-income securities is
concentrated in relatively few markets and is dominated by institutional
investors, including mutual funds, insurance companies and other financial
institutions. Accordingly, the secondary market for such securities is not as
liquid as and is more volatile than the secondary market for higher-rated
securities. In addition, the trading volume for high-yield, fixed-income
securities is generally lower than that of higher rated securities and the
secondary market for high yield, fixed-income securities could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the High Yield Fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the High Yield Fund's net asset value. A less liquid secondary
market also may make it more difficult for the High Yield Fund to obtain precise
valuations of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the High Yield Fund may have to replace
such
B-27
<PAGE>
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if the High Yield Fund experiences unexpected net
redemptions of the High Yield Fund's shares, it may be forced to sell its
higher-rated securities, resulting in a decline in the overall credit quality of
the High Yield Fund's portfolio and increasing the exposure of the High Yield
Fund to the risks of high yield securities. The High Yield Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser continually
monitors the investments in the High Yield Fund's portfolio and evaluates
whether to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
BANK OBLIGATIONS
Government Income, Global Income, High Yield and Core Funds may each invest
in obligations issued or guaranteed by United States and foreign banks
(Government Income Fund may only invest in U.S. dollar denominated securities).
Bank obligations, including without limitation time deposits, bankers'
acceptances and certificates of deposit, may be general obligations of the
parent bank or may be obligations only of the issuing branch pursuant to the
terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit
both the amount and types of loans which may be made and interest rates which
may be charged. Foreign banks are subject to different regulations and are
generally permitted to engage in a wider variety of activities than U.S. banks.
In addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
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<PAGE>
MUNICIPAL SECURITIES
Core, Municipal Income, High Yield and Short Duration Tax-Free Funds may
invest in bonds, notes and other instruments issued by or on behalf of states,
territories and possessions of the United States (including the District of
Columbia) and their political subdivisions, agencies or instrumentalities
("Municipal Securities"), the interest on which is exempt from regular federal
income tax (i.e., excluded from gross income for federal income tax purposes but
not necessarily exempt from the federal alternative minimum tax or from the
income taxes of any state or local government). In addition, Municipal
Securities include participation interests in such securities the interest on
which is, in the opinion of bond counsel or counsel selected by the Adviser,
excluded from gross income for federal income tax purposes. The Core, Municipal
Income, High Yield and Short Duration Tax-Free Funds may revise their definition
of Municipal Securities in the future to include other types of securities that
currently exist, the interest on which is or will be, in the opinion of such
counsel, excluded from gross income for federal income tax purposes, provided
that investing in such securities is consistent with each Fund's investment
objective and policies.
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a
variety of hybrid and special types of Municipal
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Securities. There are also numerous differences in the security of Municipal
Securities both within and between these two principal classifications.
For the purpose of applying a Fund's investment restrictions, the
identification of the issuer of a Municipal Security which is not a general
obligation is made by the Adviser based on the characteristics of the Municipal
Security, the most important of which is the source of funds for the payment of
principal and interest on such securities.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as Short Duration Tax-Free, Municipal
Income, High Yield and Core Funds. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many Municipal Securities that were not publicly
offered initially and such securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. The Core, High Yield, Municipal Income, and Short-Duration Tax-Free
- ---------
Funds may invest in municipal leases, certificates of participation and other
participation interests. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or
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<PAGE>
utilizing the leased equipment. Although the obligations may be secured by the
leased equipment or facilities, the disposition of the property in the event of
non-appropriation or foreclosure might prove difficult, time consuming and
costly, and result in a delay in recovering or the failure to fully recover a
Fund's original investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may
be deemed to be illiquid for the purpose of the Funds' limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by a Fund may be determined by the Adviser, pursuant to
guidelines adopted by the Trustees of the Trust, to be liquid securities for the
purpose of such limitation. In determining the liquidity of municipal lease
obligations and certificates of participation, the Adviser will consider a
variety of factors including: (1) the willingness of dealers to bid for the
security; (2) the number of dealers willing to purchase or sell the obligation
and the number of other potential buyers; (3) the frequency of trades or quotes
for the obligation; and (4) the nature of the marketplace trades. In addition,
the Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by a
Fund.
The Core, High Yield, Municipal Income and Short Duration Tax-Free Funds
may purchase participations in Municipal Securities held by a commercial bank or
other financial institution. Such participations provide a Fund with the right
to a pro rata undivided interest in the underlying Municipal Securities. In
addition, such participations generally provide a Fund with the right to demand
payment, on not more than seven days' notice, of all or any part of such Fund's
participation interest in the underlying Municipal Security, plus accrued
interest. A Fund will only invest in such participations if, in the opinion of
bond counsel, counsel for the issuers of such participations or counsel selected
by the Adviser, the interest from such participations is exempt from regular
federal income tax.
Municipal Notes. Municipal Securities in the form of notes generally are
---------------
used to provide for short-term capital needs, in anticipation of an issuer's
receipt of other revenues or financing, and typically have maturities of up to
three years. Such instruments may include tax anticipation notes, revenue
anticipation notes, bond anticipation notes, tax and revenue
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<PAGE>
anticipation notes and construction loan notes. Tax anticipation notes are
issued to finance the working capital needs of governments. Generally, they are
issued in anticipation of various tax revenues, such as income, sales, property,
use and business taxes, and are payable from these specific future taxes.
Revenue anticipation notes are issued in expectation of receipt of other kinds
of revenue, such as federal revenues available under federal revenue sharing
programs. Bond anticipation notes are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. Tax and revenue
anticipation notes combine the funding sources of both tax anticipation notes
and revenue anticipation notes. Construction Loan Notes are sold to provide
construction financing. These notes are secured by mortgage notes insured by
the FHA; however, the proceeds from the insurance may be less than the economic
equivalent of the payment of principal and interest on the mortgage note if
there has been a default. The obligations of an issuer of municipal notes are
generally secured by the anticipated revenues from taxes, grants or bond
financing. An investment in such instruments, however, presents a risk that the
anticipated revenues will not be received or that such revenues will be
insufficient to satisfy the issuer's payment obligations under the notes or that
refinancing will be otherwise unavailable.
Tax-Exempt Commercial Paper. Issues of commercial paper typically
---------------------------
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by state and local governments and their agencies to finance working
capital needs of municipalities or to provide interim construction financing and
are paid from general revenues of municipalities or are refinanced with long-
term debt. In most cases, tax-exempt commercial paper is backed by letters of
credit, lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Pre-Refunded Municipal Securities. The principal of and interest on pre-
---------------------------------
refunded Municipal Securities are no longer paid from the original revenue
source for the securities. Instead, the source of such payments is typically
an escrow fund consisting of U.S. Government Securities. The assets in the
escrow fund are derived from the proceeds of refunding bonds issued by the same
issuer as the pre-refunded Municipal Securities. Issuers of Municipal
Securities use this advance refunding technique to obtain more favorable terms
with respect to securities that are not yet subject to call or redemption by the
issuer. For example, advance refunding enables an issuer to refinance debt at
lower market interest rates, restructure debt to improve cash flow or eliminate
restrictive covenants in the indenture or other governing instrument for the
pre-refunded Municipal Securities. However, except for a change in the revenue
source from which principal and interest payments are made, the pre-refunded
Municipal Securities remain outstanding on their original terms until they
mature or are redeemed by the issuer. Pre-refunded Municipal Securities are
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<PAGE>
usually purchased at a price which represents a premium over their face value.
Private Activity Bonds. Short Duration Tax-Free, Municipal Income, High
----------------------
Yield, and Core Funds may each invest in certain types of Municipal Securities,
generally referred to as industrial development bonds (and referred to under
current tax law as private activity bonds), which are issued by or on behalf of
public authorities to obtain funds to provide privately operated housing
facilities, airport, mass transit or port facilities, sewage disposal, solid
waste disposal or hazardous waste treatment or disposal facilities and certain
local facilities for water supply, gas or electricity. Other types of
industrial development bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute Municipal Securities, although the
current federal tax laws place substantial limitations on the size of such
issues. A Tax Exempt Fund's distributions of its interest income from private
activity bonds may subject certain investors to the federal alternative minimum
tax whereas Core Fund's distributions of any tax-exempt interest it receives
from any source will be taxable for regular federal income tax purposes.
Tender Option Bonds. A tender option bond is a Municipal Security
-------------------
(generally held pursuant to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially higher than
prevailing short-term, tax-exempt rates. The bond is typically issued with the
agreement of a third party, such as a bank, broker-dealer or other financial
institution, which grants the security holders the option, at periodic
intervals, to tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the financial
institution receives periodic fees equal to the difference between the bond's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults or a significant downgrade in the credit
rating assigned to the issuer of the bond. The liquidity of a tender option bond
is a function of the credit quality of both the bond issuer and the financial
institution providing liquidity. Tender option bonds are deemed to be liquid
unless, in the opinion of the Adviser, the credit quality of the bond issuer and
the financial institution is deemed, in light of the Fund's credit quality
requirements, to be inadequate and the bond would not otherwise be readily
marketable. The Tax Exempt Funds intend to invest in tender option bonds the
interest on which will, in the opinion of bond counsel, counsel for the issuer
of interests therein or counsel selected by the Adviser, be exempt from regular
federal income tax. However, because there can be no assurance that the
Internal Revenue Service (the "Service") will agree with such counsel's
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<PAGE>
opinion in any particular case, there is a risk that a Tax Exempt Fund will not
be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions is
unclear. The Tax Exempt Funds intend to manage their portfolio in a manner
designed to eliminate or minimize any adverse impact from the tax rules
applicable to these investments.
Auction Rate Securities. The Core, High Yield, Municipal Income and Short
-----------------------
Duration Tax-Free Funds may invest in auction rate securities. Auction rate
securities consist of auction rate Municipal Securities and auction rate
preferred securities issued by closed-end investment companies that invest
primarily in Municipal Securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the
lowest interest or dividend rate that covers all securities offered for sale.
While this process is designed to permit auction rate securities to be traded at
par value, there is some risk that an auction will fail due to insufficient
demand for the securities.
Dividends on auction rate preferred securities issued by a closed-end fund
may be designated as exempt from federal income tax to the extent they are
attributable to exempt income earned by the fund on the securities in its
portfolio and distributed to holders of the preferred securities, provided that
the preferred securities are treated as equity securities for federal income tax
purposes and the closed-end fund complies with certain tests under the Code.
A Fund's investments in auction rate securities of closed-end funds are
subject to the limitations prescribed by the Act and certain state securities
regulations. The Funds will indirectly bear their proportionate share of any
management and other fees paid by such closed-end funds in addition to the
advisory fees payable directly by the Funds.
Insurance. The Funds may invest in "insured" tax-exempt Municipal
---------
Securities. Insured Municipal Securities are securities for which scheduled
payments of interest and principal are guaranteed by a private (nongovernmental)
insurance company. The insurance only entitles a Fund to receive the face or
par value of the securities held by the Fund. The insurance does not guarantee
the market value of the Municipal Securities or the value of the shares of a
Fund.
The Funds may utilize new issue or secondary market insurance. A new issue
insurance policy is purchased by a bond issuer who wishes to increase the credit
rating of a security. By paying a
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<PAGE>
premium and meeting the insurer's underwriting standards, the bond issuer is
able to obtain a high credit rating (usually, Aaa from Moody's or AAA from
Standard & Poor's) for the issued security. Such insurance is likely to
increase the purchase price and resale value of the security. New issue
insurance policies are non-cancelable and continue in force as long as the bonds
are outstanding.
A secondary market insurance policy is purchased by an investor (such as a
Fund) subsequent to a bond's original issuance and generally insures a
particular bond for the remainder of its term. The Funds may purchase bonds
which have already been insured under a secondary market insurance policy by a
prior investor, or the Funds may directly purchase such a policy from insurers
for bonds which are currently uninsured.
An insured Municipal Security acquired by a Fund will typically be covered
by only one of the above types of policies. All of the insurance policies used
by a Fund will be obtained only from insurance companies rated, at the time of
purchase, Aaa by Moody's or AAA by Standard & Poor's. The Municipal Securities
invested in by the High Yield Fund will not be subject to this requirement.
Standby Commitments. In order to enhance the liquidity of Municipal
-------------------
Securities, the Tax Exempt Funds may acquire the right to sell a security to
another party at a guaranteed price and date. Such a right to resell may be
referred to as a "standby commitment" or liquidity put, depending on its
characteristics. The aggregate price which a Fund pays for securities with
standby commitments may be higher than the price which otherwise would be paid
for the securities. Standby commitments may not be available or may not be
available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic or
foreign banks supporting the other party's ability to purchase the security from
a Tax Exempt Fund. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by a Tax Exempt Fund. In considering whether a security meets a Tax Exempt
Fund's quality standards, the particular Tax Exempt Fund will look to the
creditworthiness of the party providing the Fund with the right to sell as well
as the quality of the security itself.
The Tax Exempt Funds value Municipal Securities which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Tax Exempt
Fund's net asset value. The cost of a standby commitment is carried as
unrealized depreciation from the time of purchase until it is exercised or
expires. Since the value of a standby commitment is dependent on the ability of
the standby commitment writer to meet its obligation to repurchase, a Tax Exempt
Fund's policy is to enter into standby
B-35
<PAGE>
commitment transactions only with banks, brokers or dealers which present a
minimal risk of default.
The Adviser understands that the Service has issued a favorable revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has subsequently announced that it
will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation
interests therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Funds intend to take the position that they are the owner
of any Municipal Securities acquired subject to a standby commitment or acquired
or held with certain other types of put rights and that tax-exempt interest
earned with respect to such Municipal Securities will be tax-exempt in their
hands. There is no assurance that standby commitments will be available to the
Tax Exempt Funds nor have the Tax Exempt Funds assumed that such commitments
would continue to be available under all market conditions.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in a Fund's portfolio are called prior
to the maturity, the Fund will be required to reinvest the proceeds on such
securities at an earlier date and may be able to do so only at lower yields,
thereby reducing the Fund's return on its portfolio securities.
FOREIGN INVESTMENTS
Core, High Yield and Global Income Funds may invest in securities of
foreign issuers and in fixed-income securities quoted or denominated in a
currency other than U.S. dollars. Investing in the securities of foreign
issuers involves certain special considerations, including those set forth
below, which are not typically associated with investing in U.S. issuers. Since
investments in the securities of foreign issuers may involve currencies of
foreign countries, and since Core, High Yield and Global Income Funds may
temporarily hold funds in bank deposits in foreign currencies during completion
of investment programs, Core, High Yield and Global Income Funds may be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations and may incur costs in connection with conversions between various
currencies.
Foreign companies are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. companies. In addition, there may be less publicly available
information about a foreign company than about a comparable U.S. company.
Volume and
B-36
<PAGE>
liquidity in most foreign bond markets are less than in the United States
markets and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Commissions on foreign
securities exchanges are often fixed and generally are higher than negotiated
commissions or dealer mark-ups in the U.S. markets, although each Fund endeavors
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of securities markets
and exchanges, brokers, dealers and listed companies than in the United States.
Mail service between the United States and foreign countries may be slower or
less reliable than within the United States, thus increasing the risk of delayed
settlement of portfolio transactions or loss of certificates for portfolio
securities.
Foreign markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of Core Fund, High Yield Fund or Global
Income Fund is uninvested and no return is earned thereon. The inability of
Core Fund, High Yield Fund or Global Income Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio securities due to
settlement problems could result either in losses to Core Fund, High Yield Fund
or Global Income Fund due to subsequent declines in value of the portfolio
securities, or, if Core Fund, High Yield Fund or Global Income Fund has entered
into a contract to sell the securities, could result in possible liability to
the purchaser. In addition, with respect to certain foreign countries, there is
the possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could adversely affect Core, High
Yield or Global Income Funds' investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resources self-sufficiency and balance of payments
position.
INVESTING IN EMERGING COUNTRIES
Market Characteristics. Debt securities of most emerging markets issuers
----------------------
may be less liquid and are generally subject to greater price volatility than
securities of issuers in the U.S. and other developed countries. The markets
for securities of emerging markets may have substantially less volume than the
market for similar securities in the U.S. and may not be able to absorb, without
price disruptions, a significant increase in trading volume or trade size.
Additionally, market making and arbitrage activities are generally less
extensive in such markets, which may contribute to increased volatility and
reduced liquidity of such markets. The less liquid the market, the more
difficult it may be for the Fund to accurately price its portfolio securities or
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<PAGE>
to dispose of such securities at the times determined to be appropriate. The
risks associated with reduced liquidity may be particularly acute to the extent
that a Fund needs cash to meet redemption requests, to pay dividends and other
distributions or to pay its expenses.
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in
emerging markets may be higher than in the U.S. and other developed securities
markets. As legal systems in emerging markets develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances
where adequate laws exist, it may not be possible to obtain swift and equitable
enforcement of the law.
Economic, Political and Social Factors. Emerging markets may be subject to
--------------------------------------
a greater degree of economic, political and social instability than the U.S.,
Japan and most Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes or attempted changes
in government through extra-constitutional means; (ii) popular unrest associated
with demands for improved economic, political and social conditions; (iii)
internal insurgencies; (iv) hostile relations with neighboring countries; and
(v) ethnic, religious and racial disaffection and conflict. Many emerging
markets have experienced in the past, and continue to experience, high rates of
inflation. In certain countries inflation has at times accelerated rapidly to
hyperinflationary levels, creating a negative interest rate environment and
sharply eroding the value of outstanding financial assets in those countries.
The economies of many emerging markets are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners. In addition, the economies of some
emerging markets may differ unfavorably from the U.S. economy in such respects
as growth of gross domestic product, rate of inflation, capital reinvestment,
resources, self-sufficiency and balance of payments position.
Restrictions on Investment and Repatriation. Certain emerging markets
-------------------------------------------
require governmental approval prior to investments by
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<PAGE>
foreign persons or limit investments by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. Repatriation of
investment income and capital from certain emerging markets is subject to
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect the operation
of a Fund.
SOVEREIGN DEBT OBLIGATIONS
Investments in sovereign debt obligations involves special risks not
present in corporate debt obligations. The issuer of the sovereign debt or the
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a Fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and a Fund's net asset value, may be more
volatile than prices of debt obligations of U.S. issuers. In the past, the
governments of certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Core, High Yield and Global
Income Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
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<PAGE>
At the maturity of a forward contract, Global Income Fund, High Yield Fund
and Core Fund may either accept or make delivery of the currency specified in
the contract or, at or prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an offsetting contract. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
Global Income, High Yield or Core Funds may enter into forward foreign
currency exchange contracts in several circumstances. First, when Global
Income, High Yield or Core Funds enter into a contract for the purchase or sale
of a security quoted or denominated in a foreign currency, or when Global
Income, High Yield or Core Funds anticipate the receipt in a foreign currency of
a dividend or interest payment on such a security which it holds, Global Income,
High Yield or Core Funds may desire to "lock in" the U.S. dollar price of the
security or the U.S. dollar equivalent of such dividend or interest payment, as
the case may be. By entering into a forward contract for the purchase or sale,
for a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying transactions, Global Income, High Yield or Core Funds will
attempt to protect themselves against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of a Fund's
portfolio securities quoted or denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
Global Income, High Yield and Core Funds may engage in cross-hedging by
using forward contracts in one currency to hedge against fluctuations in the
value of securities denominated or quoted in a different currency if the
Advisers determine that there is a pattern of correlation between the two
currencies. The Global Income, High Yield and Core Funds may also purchase and
sell
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<PAGE>
forward contracts to seek to increase total return when the Advisers anticipate
that the foreign currency will appreciate or depreciate in value, but securities
quoted or denominated in that currency do not present attractive investment
opportunities and are not held in a Fund's portfolio.
Global Income, High Yield and Core Funds' custodian will place cash or
liquid assets, into a segregated account of the Fund in an amount equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Fund to purchase foreign
currencies and forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Fund's commitments
with respect to such contracts. The segregated accounts will be marked-to-
market on a daily basis. Although the contracts are not presently regulated by
the Commodity Trading Futures Commission ("CFTC"), the CFTC may in the future
assert authority to regulate these contracts. In such event, a Fund's ability to
utilize forward foreign currency exchange contracts may be restricted. The
Global Income, Core and High Yield Funds will not enter into a forward contract
with a term of greater than one year.
While Global Income, Core and High Yield Funds may enter into forward
contracts to seek to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while Global Income, Core and
High Yield Funds may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for a Fund than if it
had not engaged in any such transactions. Moreover, there may be imperfect
correlation between a Fund's portfolio holdings of securities quoted or
denominated in a particular currency and forward contracts entered into by
Global Income, Core and High Yield Funds. Such imperfect correlation may cause
the Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
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INTEREST RATE SWAPS, MORTGAGE SWAPS, CURRENCY SWAPS AND INTEREST RATE CAPS,
FLOORS AND COLLARS
Each Fund may enter into interest rate swaps, caps, floors and collars. In
addition, Core, Adjustable Rate, Government Income, Short Duration Government,
Global Income and High Yield Funds may enter into mortgage swaps and Core, High
Yield and Global Income Funds may also enter into currency swaps. Each Fund may
enter into swap transactions for hedging purposes or to seek to increase total
return. Interest rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest, such as an exchange
of fixed-rate payments for floating rate payments. Mortgage swaps are similar
to interest rate swaps in that they represent commitments to pay and receive
interest. The notional principal amount, however, is tied to a reference pool
or pools of mortgages. Currency swaps involve the exchange of the parties'
respective rights to make or receive payments in specified currencies. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination of
a cap and a floor that preserves a certain return within a predetermined range
of interest rates. Since interest rate, mortgage and currency swaps and
interest rate caps, floors and collars are individually negotiated, each Fund
expects to achieve an acceptable degree of correlation between its portfolio
investments and its swap, cap, floor and collar positions.
A Fund will enter into interest rate and mortgage swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate and mortgage swaps do not involve the delivery of
securities, other underlying assets or principal. Accordingly, the risk of loss
with respect to interest rate and mortgage swaps is limited to the net amount of
payments that a Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, a Fund's risk of loss consists of the net amount
of payments that such Fund is contractually entitled to receive, if any. In
contrast, currency swaps usually involve the delivery of the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of a currency swap is subject to the risk
that the other party to the swap will default on its contractual delivery
obligations. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or currency swap will
be accrued on a daily basis and an amount of cash or liquid assets, having an
aggregate net asset value at least equal to such accrued excess will be
maintained in a segregated account by a Fund's custodian. Inasmuch as these
transactions are entered into for hedging purposes or are offset by cash or
liquid assets, as permitted by applicable law, maintained in a segregated
account the
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Funds and the Advisers believe that swaps do not constitute senior securities
under the Act and, accordingly, will not treat them as being subject to a Fund's
borrowing restriction.
The Funds will not enter into any swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party is
rated either AA or A-1 or better by Standard & Poor's or Aa or P-1 or better by
Moody's or their equivalent ratings. If there is a default by the other party
to such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that swaps, caps, floors and collars are illiquid for purposes of
a Fund's limitation on illiquid investments.
The use of interest rate, mortgage and currency swaps, as well as interest
rate caps, floors and collars, is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values, interest rates and currency exchange rates, the investment
performance of a Fund would be less favorable than it would have been if this
investment technique were not used.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
-----------------------
options on any securities in which it may invest or on any securities index
based on securities in which it may invest. A Fund may purchase and write such
options on securities that are listed on national domestic securities exchanges
or foreign securities exchanges or traded in the over-the-counter market. A
call option written by a Fund obligates the Fund to sell specified securities to
the holder of the option at a specified price if the option is exercised at any
time before the expiration date. All call options written by a Fund are
covered, which means that the Fund will own the securities subject to the option
so long as the option is outstanding or use the other methods described below.
The purpose of a Fund in writing covered call options is to realize greater
income than would be realized in portfolio securities transactions alone.
However, in writing covered call options for additional income, a Fund may
forego the opportunity to profit from an increase in the market price of the
underlying security.
A put option written by a Fund obligates the Fund to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. The purpose of writing such
options is to generate additional income. However, in return for the option
premium, the Fund accepts the
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risk that it will be required to purchase the underlying securities at a price
in excess of the securities' market value at the time of purchase.
All call and put options written by a Fund are covered. A written call
option or put option may be covered by (i) maintaining cash or liquid assets, as
permitted by applicable law, either of which, in the case of Global Income Fund,
Core Fund or High Yield Fund, may be quoted or denominated in any currency, in a
segregated account maintained by the Fund's custodian with a value at least
equal to the Fund's obligation under the option, (ii) entering into an
offsetting forward commitment and/or (iii) purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the Fund's net exposure on its written option position.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases
are referred to as "closing purchase transactions."
Each Fund may also write (sell) covered call and put options on any
securities index composed of securities in which it may invest. Options on
securities indices are similar to options on securities, except that the
exercise of securities index options requires cash settlement payments and does
not involve the actual purchase or sale of securities. In addition, securities
index options are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security.
The Funds may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by their respective custodian) upon conversion or exchange of
other securities in its portfolio. The Funds may also cover call and put
options on a securities index by maintaining cash or liquid assets, as permitted
by applicable law, with a value equal to the exercise price in a segregated
account with their custodian or by using the other methods described above.
PURCHASING OPTIONS. Each Fund may also purchase put and call options on
------------------
any securities in which it may invest or on any securities index composed of
securities in which it may invest. A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
options it had purchased.
A Fund would normally purchase call options in anticipation of an increase,
or put options in anticipation of a decrease ("protective puts") in the market
value of securities of the type
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in which it may invest. The purchase of a call option would entitle a Fund, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. A Fund would ordinarily realize a gain on the
purchase of a call option if, during the option period, the value of such
securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to cover the premium and transaction costs; otherwise the Fund
would realize either no gain or a loss on the purchase of the put option. Gains
and losses on the purchase of put options may be offset by countervailing
changes in the value of the underlying portfolio securities.
A Fund may purchase put and call options on securities indices for the same
purposes as it may purchase options on securities. Options on securities indices
are similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security.
Transactions by a Fund in options on securities and securities indices will
be subject to limitations established by each of the exchanges, boards of trade
or other trading facilities on which such options are traded governing the
maximum number of options in each class which may be written or purchased by a
single investor or group of investors acting in concert, regardless of whether
the options are written or purchased on the same or different exchanges, boards
of trade or other trading facilities or are held or written in one or more
accounts or through one or more brokers. Thus, the number of options which a
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Advisers. An exchange, board of trade
or other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Core, Global Income
----------------------------------------------------
and High Yield Funds may write covered put and call options and purchase put and
call options on foreign currencies in an attempt to protect against declines in
the dollar value of portfolio securities and against increases in the dollar
cost of securities to be acquired. Global Income, Core and High Yield Funds may
use options on currency to cross-hedge, which
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involves writing or purchasing options on one currency to seek to hedge against
changes in exchange rates for a different currency with a pattern of
correlation. In addition, Global Income, Core and High Yield Funds may purchase
call options on currency to seek to increase total return when the Advisers
anticipate that the currency will appreciate in value, but the securities
denominated or quoted in that currency do not present attractive investment
opportunities and are not included in the Fund's portfolios.
A call option written by Core, Global Income and High Yield Funds obligates
the Fund to sell specified currency to the holder of the option at a specified
price if the option is exercised at any time before the expiration date. A put
option written by a Fund obligates the Fund to purchase specified currency from
the option holder at a specified price if the option is exercised at any time
before the expiration date. The writing of currency options involves a risk
that a Fund will, upon exercise of the option, be required to sell currency
subject to a call at a price that is less than the currency's market value or be
required to purchase currency subject to a put at a price that exceeds the
currency's market value.
A Fund may terminate its obligations under a written call or put option by
purchasing an option identical to the one written. Such purchases are referred
to as "closing purchase transactions." A Fund would also be able to enter into
closing sale transactions in order to realize gains or minimize losses on
purchased options.
Core, Global Income and High Yield Funds would normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by the Fund are denominated or quoted. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
Core, Global Income and High Yield Funds would normally purchase put
options in anticipation of a decline in the U.S. dollar value of currency in
which securities in its portfolio are denominated or quoted ("protective puts").
The purchase of a put option would entitle Core, Global Income and High Yield
Funds, in exchange for the premium paid, to sell specified currency at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the U.S. dollar value of
a Fund's portfolio securities due to currency exchange rate fluctuations. A
Fund would ordinarily realize a gain if, during the option period, the value 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
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<PAGE>
protective put options would tend to be offset by countervailing changes in the
value of underlying currency.
In addition to using options for the hedging purposes described above,
Core, Global Income and High Yield Funds may use options on currency to seek to
increase total return. Global Income Fund, High Yield Fund and Core Fund may
write (sell) covered put and call options on any currency in an attempt to
realize greater income than would be realized on portfolio securities
transactions alone. However, in writing covered call options for additional
income, Global Income, High Yield and Core Funds may forego the opportunity to
profit from an increase in the market value of the underlying currency. Also,
when writing put options, Global Income, High Yield and Core Funds accept, in
return for the option premium, the risk that it may be required to purchase the
underlying currency at a price in excess of the currency's market value at the
time of purchase.
Global Income, High Yield and Core Funds would normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. Global Income, High Yield and Core Funds would
ordinarily realize a gain if, during the option period, the value of such
currency exceeded the sum of the exercise price, the premium paid and
transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the call option. Put
options may be purchased by the Global Income, High Yield and Core Funds for
the purpose of benefiting from a decline in the value of currencies which it
does not own. Global Income, High Yield and Core Funds would ordinarily realize
a gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs. Otherwise Global Income, High Yield and Core Funds would
realize either no gain or a loss on the purchase of the put option.
YIELD CURVE OPTIONS. Each Fund may enter into options on the yield
-------------------
"spread," or yield differential between two securities. Such options are
referred to as "yield curve" options. In contrast to other types of options, a
yield curve option is based on the difference between the yields of designated
securities, rather than the prices of the individual securities, and is settled
through cash payments. Accordingly, a yield curve option is profitable to the
holder if this differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying securities
increase or decrease.
Yield curve options may be used for the same purposes as other options on
securities. For example, a Fund may purchase a call option on the yield spread
between two securities if it owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. A Fund may also purchase or write
yield curve options for other than hedging purposes (i.e., in an attempt to
increase its current income) if, in the judgment of the
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<PAGE>
Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is
subject to all of the risks associated with the trading of other types of
options. In addition, however, such options present a risk of loss even if the
yield of one of the underlying securities remains constant, or if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by a Fund must be "covered." A call (or put)
option is covered if the Fund holds another call (or put) option on the spread
between the same two securities and maintains in a segregated account with its
custodian cash or liquid assets, as permitted by applicable law, sufficient to
cover the Fund's net liability under the two options. Therefore, a Fund's
liability for such a covered option is generally limited to the difference
between the amount of the Fund's liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be
covered in such other manner as may be in accordance with the requirements of
the counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
------------------------------------------
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
currencies or dispose of assets held in a segregated account until the options
expire or are exercised. Similarly, if a Fund is unable to effect a closing
sale transaction with respect to options it has purchased, it would have to
exercise the options in order to realize any profit and will incur transaction
costs upon the purchase or sale of underlying securities or currencies.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or the Options
Clearing Corporation may not at all times be adequate to handle current trading
volume; or (vi) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of options
(or a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist although outstanding options on that exchange that had been issued by the
Options Clearing Corporation
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<PAGE>
as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
A Fund's ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. Until
such time as the staff of the SEC changes its position, the Funds will treat
purchased over-thecounter options and all assets used to cover written over-
thecounter options as illiquid securities, except that with respect to options
written with primary dealers in U.S. Government Securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount of illiquid securities may be calculated with reference to a formula
approved by the SEC.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of options for
hedging purposes depends in part on the applicable Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
To seek to increase total return or to hedge against changes in interest
rates or securities prices or, in the case of Core, High Yield and Global Income
Funds, currency exchange rates, each Fund may purchase and sell various kinds of
futures contracts, and purchase and write call and put options on any of such
futures contracts. Each Fund may also enter into closing purchase and sale
transactions with respect to any of such contracts and options. The futures
contracts may be based on various securities (such as U.S. Government
Securities), securities indices, foreign currencies in the case of Global
Income, Core and High Yield Funds and any other financial instruments and
indices. A Fund will engage in futures and related options transactions only
for bona fide hedging purposes as defined below or for purposes of seeking to
increase total return to the extent permitted by regulations of the CFTC. All
futures contracts entered into by a Fund are traded on U.S. exchanges or boards
of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
-----------------
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, a
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<PAGE>
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Core, Global Income and High Yield Funds may each seek
to offset anticipated changes in the value of a currency in which its portfolio
securities, or securities that it intends to purchase, are quoted or denominated
by purchasing and selling futures contracts on such currencies.
Positions taken in the futures markets are not normally held to maturity
but are instead liquidated through offsetting transactions which may result in a
profit or a loss. While futures contracts on securities or currency will
usually be liquidated in this manner, a Fund may instead make, or take, delivery
of the underlying securities or currency whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currency are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
------------------
establish with more certainty than would otherwise be possible the effective
price or rate of return on portfolio securities or securities that a Fund
proposes to acquire or the exchange rate of currencies in which portfolio
securities are quoted or denominated. A Fund may, for example, take a "short"
position in the futures market by selling futures contracts to seek to hedge
against an anticipated rise in interest rates or a decline in market prices or
foreign currency rates that would adversely affect the U.S. dollar value of the
Fund's portfolio securities. Such futures contracts may include contracts for
the future delivery of securities held by a Fund or securities with
characteristics similar to those of a Fund's portfolio securities. Similarly,
Core Fund, High Yield Fund and Global Income Fund may each sell futures
contracts on any currencies in which its portfolio securities are quoted or
denominated or in one currency to seek to hedge against fluctuations in the
value of securities denominated in a different currency if there is an
established historical pattern of correlation between the two currencies. If,
in the opinion of the Advisers, there is a sufficient degree of correlation
between price trends for a Fund's portfolio securities and futures contracts
based on other financial instruments, securities indices or other indices, the
Funds may also enter into such futures contracts as part of its hedging
strategy. Although under some circumstances prices of securities in a Fund's
portfolio may be more or less volatile than prices of such futures contracts,
the Advisers will attempt to estimate the extent of this volatility difference
based on historical patterns and compensate for any such differential by having
a Fund enter into a greater or lesser number of futures contracts or by
attempting to achieve only a partial hedge against price changes affecting a
Fund's portfolio securities. When hedging of this character is successful, any
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
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value of a Fund's portfolio securities would be substantially offset by a
decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices or currency exchange rates then available in the applicable
market to be less favorable than prices that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
----------------------------
futures contracts will give a Fund the right (but not the obligation) for a
specified price to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of a Fund's assets. By
writing a call option, a Fund becomes obligated, in exchange for the premium,
(upon exercise of the option) to sell a futures contract if the option is
exercised, which may have a value higher than the exercise price. Conversely,
the writing of a put option on a futures contract generates a premium which may
partially offset an increase in the price of securities that a Fund intends to
purchase. However, a Fund becomes obligated (upon exercise of the option) to
purchase a futures contract if the option is exercised, which may have a value
lower than the exercise price. Thus, the loss incurred by a Fund in writing
options on futures is potentially unlimited and may exceed the amount of the
premium received. The Funds will incur transaction costs in connection with the
writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures and related options
--------------------
transactions only for bona fide hedging or to seek to increase total return as
permitted by CFTC regulations which permit principals of an investment company
registered under the Act to engage in such transactions without registering as
commodity pool operators. Each Fund will determine that the price fluctuations
in the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Fund or
securities or instruments which it expects to purchase. Except as stated below,
each Fund's futures transactions will be entered into for
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traditional hedging purposes -- i.e., futures contracts will be sold to protect
against a decline in the price of securities (or the currency in which they are
quoted or denominated) that a Fund owns or futures contracts will be purchased
to protect a Fund against an increase in the price of securities (or the
currency in which they are quoted or denominated) it intends to purchase. As
evidence of this hedging intent, each Fund expects that on 75% or more of the
occasions on which it takes a long futures or option position (involving the
purchase of futures contracts), the Fund will have purchased, or will be in the
process of purchasing, equivalent amounts of related securities (or assets
denominated in the related currency) in the cash market at the time when the
futures or option position is closed out. However, in particular cases, when it
is economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities or other assets.
As an alternative to compliance with the bona fide hedging definition, a
CFTC regulation permits the Funds to elect to comply with a different test under
which the aggregate initial margin and premiums required to establish positions
to seek to increase total return in futures contracts and options on futures
will not exceed 5% of the net asset value of a Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Funds will engage in transactions in futures contracts and related options only
to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code") for maintaining their
qualifications as regulated investment companies for federal income tax
purposes. See "Taxation."
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
establish with the custodian a segregated account consisting of cash or liquid
assets, as permitted by applicable law, in an amount equal to the underlying
value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices or currency
exchange rates may result in a poorer overall performance for a Fund than if it
had not entered into any futures contracts or options transactions. In the
event of an imperfect correlation between a futures position and a portfolio
position which is intended to be protected, the desired protection may not be
obtained and a Fund may be exposed to risk of loss. In addition, it is not
possible to hedge fully or protect against currency fluctuations affecting the
value of 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.
B-52
<PAGE>
Perfect correlation between a Fund's futures positions and portfolio
positions will be impossible to achieve. There are no futures contracts based
upon individual securities, except certain U.S. Government Securities. The only
futures contracts available to hedge a Fund's portfolio are various futures on
U.S. Government Securities, securities indices and foreign currencies.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Taxable Funds may enter into mortgage "dollar rolls" in which a Fund
sells securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity), but not identical securities on a specified future date. During the
roll period, a Fund loses the right to receive principal and interest paid on
the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Funds treat mortgage dollar
rolls as two separate transactions; one involving the purchase of a security and
a separate transaction involving a sale. The Funds do not currently intend to
enter into mortgage dollar rolls that are accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if
the broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of
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<PAGE>
convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. Convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality. However, when the market price of the common
stock underlying a convertible security exceeds the conversion price, the price
of the convertible security tends to reflect the value of the underlying common
stock. As the market price of the underlying common stock declines, the
convertible security tends to trade increasingly on a yield basis, and thus may
not depreciate to the same extent as the underlying common stock. Convertible
securities in which the Core Fund and High Yield Fund invest will be subject to
the same rating criteria as its other investments in fixed-income
securities.
LENDING OF PORTFOLIO SECURITIES
Each Fund may lend portfolio securities. Under present regulatory
policies, such loans may be made to institutions, such as brokers or dealers and
would be required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities maintained on a
current basis in an amount at least equal to the market value of the securities
loaned. Cash collateral may be invested in cash equivalents. A Fund has the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund continues to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned and
also receives compensation from investment of the collateral. A Fund would not
have the right to vote any securities having voting rights during the existence
of the loan, but a Fund would call the loan in anticipation of an important vote
to be taken among holders of the securities or the giving or withholding of
their consent on a material matter affecting the investment. As with other
extensions of credit there are risks of delay in recovering, or even loss of
rights in, the collateral should the borrower of the securities fail
financially. However, the loans are made only to firms deemed by the applicable
Adviser to be of good standing, and when, in the judgment of the applicable
Adviser, the consideration which can be earned currently from securities loans
of this type justifies the attendant risk. If an Adviser determines to make
securities loans, the value of the securities loaned will not exceed one-third
of the value of the total assets of each Fund.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain
B-54
<PAGE>
SMBS, municipal leases, certain over-the-counter options, securities that are
not readily marketable and Restricted Securities, unless the Board of Trustees
determines, based upon a continuing review of the trading markets for the
specific Restricted Securities, that such Restricted Securities are liquid.
Certain commercial paper issued in reliance on Section 4(2) of the 1933 Act is
treated like Rule 144A Securities. The Trustees have adopted guidelines and
delegated to the Advisers the daily function of determining and monitoring the
liquidity of the Funds' portfolio securities. The Board of Trustees, however,
will retain sufficient oversight and be ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly how
the market for Restricted Securities sold and offered under Rule 144A or Section
4(2) will develop, the Trustees will carefully monitor the Funds' investments in
these securities, focusing on such important factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Fund to the
extent that qualified institutional buyers become for a time uninterested in
purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Each Fund may purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are negotiated directly with the other party,
and such commitments are not traded on exchanges. The Funds will purchase
securities on a when-issued basis or purchase or sell securities on a forward
commitment basis only with the intention of completing the transaction and
actually purchasing or selling the securities. If deemed advisable as a matter
of investment strategy, however, the Funds may dispose of or negotiate a
commitment after entering into it. A Fund also may sell securities it has
committed to purchase before those securities are delivered to the Fund on the
settlement date. The Funds may realize a capital gain or loss in connection
with these transactions. For purposes of determining each Fund's duration, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date. Each Fund is required to hold and maintain in a segregated
account with the Fund's custodian until three days prior to settlement date,
cash or liquid assets,
B-55
<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, each Fund
may enter into offsetting contracts for the forward sale of other securities
that it owns. Securities purchased or sold on a when-issued or forward
commitment basis involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date or if the value of the security
to be sold increases prior to the settlement date.
OTHER INVESTMENT COMPANIES
Each Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of purchase, in the securities of other investment
companies, but may not invest more than 5% of its total assets in the securities
of any one investment company or acquire more than 3% of the voting securities
of any other investment company. Pursuant to an exemptive order obtained from
the SEC, the Funds may invest in money market funds for which the Adviser or any
of its affiliates serves as investment adviser. A Fund will indirectly bear its
proportionate share of any management fees and other expenses paid by investment
companies in which it invests in addition to the advisory and administration
fees paid by the Fund. However, to the extent that a Fund invests in a money
market fund for which the Adviser acts as adviser, the management fees payable
by the Fund to the Adviser will be reduced by an amount equal to the Fund's
proportionate share of the management fees paid by such money market fund to the
Adviser or any of its affiliates.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with selected broker-
dealers, banks or other financial institutions. A repurchase agreement is an
arrangement under which a Fund purchases securities and the seller agrees to
repurchase the securities within a particular time and at a specified price.
Custody of the securities will be maintained by each Fund's custodian. The
repurchase price may be higher than the purchase price, the difference being
income to a Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to a Fund together with the repurchase price on
repurchase. In either case, the income to a Fund is unrelated to the interest
rate on the security subject to the repurchase agreement.
For purposes of the Act and, generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the 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
B-56
<PAGE>
a Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
risk of losing some or all of the principal and interest involved in the
transaction.
As with any unsecured debt instrument purchased for each Fund, the
applicable Adviser seeks to minimize the risk of loss from repurchase agreements
by analyzing the creditworthiness of the obligor, in this case the seller of the
security. Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, if
the market value of the security subject to the repurchase agreement becomes
less than the repurchase price (including accrued interest), each Fund will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement equals or
exceeds the repurchase price. Certain repurchase agreements which provide for
settlement in more than seven days can be liquidated before the nominal fixed
term on seven days or less notice. Such repurchase agreements will be regarded
as liquid instruments.
In addition, the Funds, together with other registered investment companies
having management agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions on behalf of
the Funds, none of which may be changed without the approval of the holders of a
majority of the outstanding voting securities of the affected Fund. The
investment objective of each Fund and all other investment policies or practices
of the Funds, except for Short Duration Tax-Free Fund's and Municipal Income
Fund's policy to invest under normal market conditions 80% of its net assets in
Municipal Securities, are considered by the Trust not to be fundamental and
accordingly may be changed without shareholder approval. See "INVESTMENT
OBJECTIVES AND POLICIES" in the Prospectuses. As defined in the Act, "a
majority of the outstanding voting securities" of a Fund means the vote (a) of
67% or more of the shares of the Fund present at a meeting, if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy or (b) more than 50% of the outstanding shares of the Fund, whichever
is less.
For the purposes of the limitations (except for the asset coverage
requirement with respect to borrowings), any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Tax
Exempt Funds, the identification of the issuer of a
B-57
<PAGE>
Municipal Security that is not a general obligation is made by the Adviser based
on the characteristics of the Municipal Security, the most important of which is
the source of funds for the payment of principal and interest on such
securities.
AS A MATTER OF FUNDAMENTAL POLICY, A FUND MAY NOT:
(1) make any investment inconsistent with the Fund's classification as a
diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act.
(2) invest more than 25% of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. government or its agencies or
instrumentalities). (For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to be
in the industry of their parents if their activities are primarily
related to financing the activities of their parents). This
restriction does not apply to investments in municipal securities
which have been pre-refunded by the use of obligations of the U.S.
government or any of its agencies or instrumentalities. Each of the
Municipal Income and Short Duration Tax-Free Funds may invest 25% or
more of the value of its total assets in municipal securities which
are related in such a way that an economic, business or political
development or change affecting one municipal security would also
affect the other municipal securities. These municipal securities
include (a) municipal securities, the interest on which is paid
solely from revenues of similar projects such as hospitals, electric
utility systems, multi-family housing, nursing homes, commercial
facilities (including hotels), steel companies or life care
facilities, (b) municipal securities whose issuers are in the same
state and (c) industrial development obligations.
(3) borrow money, except (a) the Fund may borrow from banks (as defined
in the Act) or through reverse repurchase agreements in amounts up
to 33 1/3% or its total assets (including the amount borrowed), (b)
the Fund may, to 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
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<PAGE>
purchases and sales of portfolio securities, (d) the Fund may
purchase securities on margin to the extent permitted by applicable
law and (e) the Fund may engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted by
applicable law.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an
underwriting.
(6)(a) for each Fund other than Core Fund, purchase, hold or deal in real
estate, although a Fund may purchase and sell securities that are
secured by real estate or interests therein, securities of real
estate investment trusts and mortgage-related securities and may
hold and sell real estate acquired by a Fund as a result of the
ownership of securities.
(6)(b) in the case of the Core Fund, purchase, hold or deal in real estate
(including real estate limited partnerships) or oil, gas or mineral
leases, although the Fund may purchase and sell securities that are
secured by real estate or interests therein, may purchase mortgage-
related securities and may hold and sell real estate acquired by the
Fund as a result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts that
are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same fundamental investment
objectives, restrictions and policies as the Fund.
In addition, as non-fundamental policies, a Fund may not:
(1) Invest in companies for the purpose of exercising control or
management.
(2) Invest more than 15% of the Fund's net assets in illiquid
investments including repurchase agreements
B-59
<PAGE>
maturing in more than seven days, securities which are not readily
marketable and restricted securities not eligible for resale
pursuant to Rule 144A under the 1933 Act.
(3) Purchase additional securities if the Fund's borrowings exceed
(excluding covered mortgage dollar rolls) 5% of its net assets.
(4) Make short sales of securities, except short sales against the box.
MANAGEMENT
TRUSTEES AND OFFICERS
- ---------------------
Information pertaining to the Trustees and officers of the Trust is set
forth below together with their respective positions and a brief statement of
their principal occupations during the past five years. Trustees and Officers
deemed to be "interested persons" of the Trust for purposes of the Act are
indicated by an asterisk.
Ashok N. Bakhru, Age 53, 1325 Avenue of the Americas, 34th Floor, New York, New
York 10019. Chairman and Trustee. Executive Vice President-Finance and
--------------------
Administration and Chief Financial Officer, Coty Inc. (since April 1996);
President, ABN Associates, Inc. (June 1994 through March 1996); Senior Vice
President, Scott Paper Company (until June 1994); Director, Arkwright Mutual
Insurance Company; Trustee, International House of Philadelphia; Member of
Cornell University Council; Trustee of Walnut Street Theater.
David B. Ford,* Age 51, One New York Plaza, New York, New York 10004. Trustee.
-------
Managing Director, Goldman Sachs (since 1996); General Partner, Goldman Sachs,
(1986-1996); Co-Head of GSAM since December 1994.
Douglas C. Grip,* Age 35, One New York Plaza, New York, New York 10004.
President and Trustee. Vice President, Goldman Sachs since May 1996; President,
- ---------------------
MFS Retirement Services Inc., of Massachusetts Financial Services prior thereto.
John P. McNulty,* Age 44, One New York Plaza, New York, New York 10004.
Trustee. Managing Director, Goldman Sachs since 1996; General Partner of
- -------
Goldman Sachs from 1990 to 1994 and 1995-1996; Co-Head of GSAM since November
1996; Limited Partner of Goldman Sachs from 1994 to November 1995.
Mary P. McPherson, Age 60, Taylor Hall, Bryn Mawr College, Bryn Mawr, PA 19010.
Trustee. President of Bryn Mawr College since 1978; Director of Josiah Macy,
- -------
Jr. Foundation since 1977; Director of the Philadelphia Contributionship since
1985; Director of Amherst College since 1986; Director of Dayton Hudson
Corporation since 1988; Director of the Spencer Foundation since 1993; and
member of PNC Advisory Board since 1993.
Alan A. Shuch,* Age 48, One New York Plaza, New York, New York 10004. Trustee.
-------
Limited Partner, Goldman Sachs (since 1994); Director and Vice President,
Goldman Sachs Funds Management, Inc. from April 1990 to November 1994; President
and Chief Operating Officer, GSAM from September 1988 to November 1994; Limited
Partner, Goldman Sachs since December 1994.
Jackson W. Smart, Jr., Age 66, One Northfield Plaza, #218, Northfield, Illinois
60093. Trustee. Chairman, Executive Committee, First Commonwealth, Inc. (a
-------
managed dental care company, since January 1996); Chairman and Chief Executive
Officer, MSP
B-60
<PAGE>
Communications Inc. (a company engaged in radio broadcasting) since November
1988; Director, Federal Express Corporation since 1976; Evanston Hospital
Corporation (since 1980) and First Commonwealth,Inc. (since 1988) and North
American Private Equity Group (a venture capital fund).
William H. Springer, Age 67, 701 Morningside Drive, Lake Forest, Illinois 60045.
Trustee. Vice Chairman and Chief Financial and Administrative Officer,
- -------
Ameritech (a telecommunications holding company) from February 1987 to
retirement in June 1992; Director, Walgreen Co. (a retail drugstore business);
and Baker, Fentress & Co. (a closed-end non-diversified management investment
company) April 1992 to present.
Richard P. Strubel, Age 57, 70 West Madison Street, Suite 1400, Chicago,
Illinois 60602. Trustee. Managing Director, Tandem Partners, Inc. (since
-------
1990); President and Chief Executive Officer, Microdot, Inc. (a diversified
manufacturer of fastening systems and connectors) from January 1984 to October
1994.
Pauline Taylor,* Age 50, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs since June 1992; Director of
- ---------
Shareholder Servicing since June 1992.
Nancy L. Mucker,* Age 47, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
John W. Mosior,* Age 58, 4900 Sears Tower, Chicago, Illinois 60606. Vice
----
President. Vice President, Goldman Sachs; Manager, Shareholder Services for
- ---------
GSAM since November 1989.
Scott M. Gilman,* Age 37, One New York Plaza, New York, New York 10004.
Treasurer. Director, Mutual Funds Administration, GSAM since April 1994.
- ---------
Assistant Treasurer of Goldman Sachs Funds Management, Inc. since March 1993.
Vice President, Goldman Sachs since March, 1990.
John M. Perlowski, Age 32, One New York Plaza, New York, New York 10004.
Assistant Treasurer. Vice President, Goldman, Sachs & Co., since July 1995.
- -------------------
Director/Fund Accounting & Custody, Investors Bank & Trust Co., November 1993 to
July 1995. Formerly, Manager, Audit Division, Arthur Andersen, September 1986 to
November 1993.
Michael J. Richman,* Age 36, 85 Broad Street, New York, New York 10004.
Secretary. Associate General Counsel of GSAM since February 1994; Vice
- ---------
President and Assistant General Counsel of Goldman Sachs; Counsel to the Funds
Group, GSAM since June 1992; Partner, Hale and Dorr from September 1991 to June
1992.
Howard B. Surloff,* Age 31, 85 Broad Street, New York, New York 10004. Assistant
---------
Secretary. Vice President and Assistant General Counsel, Goldman Sachs since
- ---------
November 1993 and May 1994, respectively; Counsel to the Funds Group, GSAM since
November 1993; Associate of Shereff, Friedman, Hoffman & Goodman prior thereto.
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<PAGE>
Valerie A. Zondorak,* Age 31, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Vice President, Goldman Sachs (since March 1997); Counsel
- --------------------
to the Funds Group, GSAM (since March 1997); Associate of Shereff, Freidman,
Hoffman & Goodman (prior thereto).
Steven E. Hartstein*, Age 33, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Legal Products Analyst, Goldman Sachs since June 1993;
- -------------------
Funds Compliance Officer, Citibank Global Asset Management from August 1991 to
June 1993); Legal Assistant, Brown & Wood prior thereto.
Deborah A. Farrell*, Age 25, 85 Broad Street, New York, New York 10004.
Assistant Secretary. Administrative Assistant, Goldman Sachs since January
- -------------------
1994. Formerly at Cleary, Gottlieb, Stein and Hamilton.
Kaysie Uniacke*, Age 36, One New York Plaza, New York, New York 10004.
Assistant Secretary. Vice President and Senior Portfolio Manager, GSAM since
- -------------------
1988.
Elizabeth D. Anderson*, Age 27, One New York Plaza, New York, New York 10004.
Assistant Secretary. Portfolio Manager, GSAM since April 1996; Junior Portfolio
- -------------------
Manager, Goldman Sachs 1995-1996. Funds Trading Assistant, GSAM 1993-1995.
Compliance Analyst, Prudential Insurance, from 1991 to 1993.
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor. As of April 1, 1997, the
Trustees and officers as a group owned less than 1% of the outstanding shares of
beneficial interest of each Fund.
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<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the one-year period ended October
31, 1996:
<TABLE>
<CAPTION>
Total
Pension or Compensation
Aggregate Retirement from Goldman
Compensation Benefits Accrued Sachs Funds
from the as of Part of (including
Funds/1/ Trust's Expenses the Funds)/2/
------------ ---------------- --------------
<S> <C> <C> <C>
Name of Trustees
Ashok N. Bakhru $4,109 $0 $77,375
Marcia L. Beck/3/ $0 $0 $0
David B. Ford $0 $0 $0
Douglas C. Grip $0 $0 $0
Paul C. Nagel, Jr./4/ $2,525 $0 $50,500
Alan A. Shuch $0 $0 $0
Jackson W. Smart $3,169 $0 $65,750
William H. Springer $3,169 $0 $65,750
Richard P. Strubel $3,169 $0 $65,750
</TABLE>
/1/ Reflects amount paid by Goldman Sachs Trust, a Massachusetts business
trust, during fiscal year ended October 31, 1996.
/2/ The Goldman Sachs Funds consisted of 29 mutual funds, including the seven
series of the Trust, on October 31, 1996.
/3/ Resigned as of May 1, 1996.
/4/ Retired as of June 30, 1996.
B-63
<PAGE>
INVESTMENT ADVISERS
- -------------------
GSAM, One New York Plaza, New York, New York 10004, a separate operating
division of Goldman Sachs, serves as the investment adviser to Municipal Income
Fund, Government Income Fund, Short Duration Tax-Free Fund, High Yield Fund and
Core Fund pursuant to a management agreement. GSFM, One New York Plaza, New
York, New York 10004, serves as the investment adviser to Adjustable Rate Fund
and Short Duration Government Fund pursuant to a management agreement. GSFM, a
Delaware limited partnership, is an affiliate of Goldman Sachs. GSAMI, 133
Peterborough Court, London EC4A 2BB, England, serves as investment adviser to
Global Income Fund pursuant to a management agreement. As a company with
unlimited liability under the laws of England, GSAMI is regulated by the
Investment Management Regulatory Organization Limited, a United Kingdom self-
regulatory organization, in the conduct of its investment advisory business.
See "MANAGEMENT" in the Funds' Prospectuses for a description of the applicable
Adviser's duties as investment adviser.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24 hours a day. The firm
is headquartered in New York and has offices throughout the United States and in
Beijing, Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico,
Milan, Montreal, Osaka, Paris, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Advisers are able to draw on the substantial research and market
expertise of Goldman Sachs, whose investment research effort is one of the
largest in the industry. With an annual equity research budget approaching
$160 million, Goldman Sachs' Investment Research Department covers approximately
1,700 companies, including approximately 1,000 U.S. corporations in 60
industries. The in-depth information and analyses generated by Goldman Sachs'
research analysts are available to the Advisers. The Advisers manage money for
some of the world's largest institutional investors.
For more than a decade, Goldman Sachs has been among the top-ranked firms
in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry
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<PAGE>
surveys conducted in the U.S. and abroad. Goldman Sachs is also among the
leading investment firms using quantitative analytics (now used by a growing
number of investors) to structure and evaluate portfolios. For example, Goldman
Sachs' options evaluation model analyzes each security's term, coupon and call
option, providing an overall analysis of the security's value relative to its
interest risk.
In planning the Tax Exempt Funds' strategies, the portfolio managers also
evaluate and monitor individual issues by using analytical techniques that have
traditionally been applied to corporate bonds and Mortgage-Backed Securities.
In particular, the Adviser's embedded option valuation model provides a picture
of an individual security's relative value and the portfolio's overall interest
rate risk. By constantly reviewing the positions of securities within the
portfolio, the Adviser looks for opportunities to enhance the Tax Exempt Funds'
yields by fine-tuning the portfolio, using quantitative tools designed for
municipal portfolio management. The Adviser, which managed approximately $3
billion in tax-free securities in 1996, has assembled an experienced team of
professionals for selection of the Tax Exempt Funds' portfolio securities.
In structuring Adjustable Rate Fund's and Short Duration Government Fund's
respective securities portfolio, the Adviser will review the existing overall
economic and mortgage market trends. The Adviser will then study yield spreads,
the implied volatility and the shape of the yield curve. The Adviser will then
apply this analysis to a list of eligible securities that meet the respective
Fund's investment guidelines. With respect to Adjustable Rate Fund, this
analysis is used to plan a two-part portfolio, which will consist of a "core"
portfolio of ARMs and a "relative value" portfolio of other mortgage assets that
can enhance portfolio returns and lower risk (such as investments in CMO
floating-rate tranches and interest only stripped Mortgage-Backed Securities).
With respect to Adjustable Rate Fund, Government Income Fund, Short
Duration Government Fund, High Yield Fund and Core Fund, the applicable Adviser
expects to utilize Goldman Sachs' sophisticated option-adjusted analytics to
help make strategic asset allocations within the markets for U.S. government,
Mortgage-Backed and other securities and to employ this technology periodically
to re-evaluate the Funds' investments as market conditions change. Goldman
Sachs has also developed a prepayment model designed to estimate mortgage
prepayments and cash flows under different interest rate scenarios. Because a
Mortgage-Backed Security incorporates the borrower's right to prepay the
mortgage, the Advisers use a sophisticated option-adjusted spread (OAS) model to
measure expected returns. A security's OAS is a function of the level and shape
of the yield curve, volatility and the applicable Adviser's expectation of how a
change in interest rates will affect prepayment levels. Since the OAS model
assumes a relationship between prepayments and interest rates, the Advisers
consider it a better way to measure a security's expected return and absolute
and relative values than yield to maturity. In using OAS
B-65
<PAGE>
technology, the Advisers will first evaluate the absolute level of a security's
OAS considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The Advisers will then analyze its value relative to alternative
investments and to its own investments. The Advisers will also measure a
security's interest rate risk by computing an option adjusted duration (OAD).
The Advisers believe a security's OAD is a better measurement of its price
sensitivity than cash flow duration, which systematically misstates portfolio
duration. The Advisers also evaluate returns for different mortgage market
sectors and evaluate the credit risk of individual securities. This
sophisticated technical analysis allows the Advisers to develop portfolio and
trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers will use OAS analytics to choose what they believe is an
appropriate portfolio of investments for Adjustable Rate Fund, Government Income
Fund, Short Duration Government Fund and Core Fund from a universe of eligible
investments. In connection with initial portfolio selections, in addition to
using OAS analytics as an aid to meeting each Fund's particular composition and
performance targets, the Advisers will also take into account important market
criteria like the available supply and relative liquidity of various mortgage
securities in structuring the portfolio.
The Advisers also expect to use OAS analytics to evaluate the mortgage
market on an ongoing basis. Changes in the relative value of various Mortgage-
Backed Securities could suggest tactical trading opportunities for the Funds.
The Advisers will have access to both current market analysis as well as
historical information on the relative value relationships among different
Mortgage-Backed Securities. Current market analysis and historical information
is available in the Goldman Sachs database for most actively traded Mortgage-
Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
B-66
<PAGE>
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments
in U.S. and foreign fixed-income markets, assesses the outlooks for various
sectors of the markets and provides relative value comparisons, as well as
analyzes trading opportunities within and across market sectors. The Fixed
Income Research Department is at the forefront in developing and using computer-
based tools for analyzing fixed-income securities and markets, developing new
fixed income products and structuring portfolio strategies for investment policy
and tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and from time to time may review the credit
quality of a Fund's investments.
In addition to fixed-income research and credit research, the Advisers in
managing Global Income Fund are supported by Goldman Sachs' economics research.
The Economics Research Department, based in London, conducts economic, financial
and currency markets research which analyzes economic trends and interest and
exchange rate movements worldwide. The Economics Research Department tracks
factors such as inflation and money supply figures, balance of trade figures,
economic growth, commodity prices, monetary and fiscal policies, and political
events that can influence interest rates and currency trends. The success of
Goldman Sachs' international research team has brought wide recognition to its
members. The team has earned top rankings in the annual "Extel Financial
Survey" of U.K. investment managers in the following categories: U.K. Economy
1989-1995; International Economies 1986, 1988-1995; International Government
Bond Market 1993-1995; and Currency Movements 1986-1993.
In allocating assets in the Global Income Fund's portfolio among
currencies, the Adviser will have access to the Global Asset Allocation Model.
The model is based on the observation that the prices of all financial assets,
including foreign currencies, will adjust until investors globally are
comfortable holding the pool of outstanding assets. Using the model, the
Adviser will estimate the total returns from each currency sector which are
consistent with the average investor holding a portfolio equal to the market
capitalization of the financial assets among those currency sectors. These
estimated equilibrium returns are then combined with Goldman Sachs' research
professionals' expectations to produce an optimal currency and asset allocation
for the level of risk suitable for the Fund's investment objective and criteria.
Each Fund's management agreement, (the "Management Agreements"), was most
recently approved by the Trustees of the Trust, including a majority of the
Trustees of the Trust who are not parties to such agreements or "interested
persons" (as such term is defined in the Act) of any party thereto (the "non-
interested Trustees"), on April 23, 1997. The applicable Fund's
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<PAGE>
Management Agreement was approved by the shareholders of Adjustable Rate Fund on
October 30, 1991, the shareholders of Short Duration Government Fund on March
27, 1989, the sole initial shareholder of Short Duration Tax-Free Fund on
September 25, 1992, the sole initial shareholder of Core Fund on October 29,
1993, and the shareholders of each other Fund on April 21, 1997. Each
Management Agreement will remain in effect until June 30, 1998 and will continue
in effect with respect to the applicable Fund from year to year thereafter
provided such continuance is specifically approved at least annually by (a) the
vote of a majority of the outstanding voting securities of such Fund or a
majority of the Trustees of the Trust, and (b) the vote of a majority of the
non-interested Trustees of the Trust, cast in person at a meeting called for the
purpose of voting on such approval.
Each Management Agreement will terminate automatically if assigned (as
defined in the Act). Each Management Agreement is also terminable at any time
without penalty by the Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund on 60 days' written notice to the
applicable Adviser or by the Adviser on 60 days' written notice of the Trust.
The Management Agreements provide that GSAM, GSFM and GSAMI, in their
capacity as advisers may each render similar services to others so long as the
services under the Management Agreements are not impaired thereby. Pursuant to
the Management Agreements, the Advisers are entitled to receive the fee set
forth below and the Advisers are currently limiting the fee to the rate set
forth below:
<TABLE>
<CAPTION>
Contractual Current
Fund Rate* Rate
- ---- ----- ----
<S> <C> <C>
GSAM
Municipal Income .55% .55%
Government Income .65% .25%
Short Duration Tax-Free .55% .40%
Core Fixed Income .55% .40%
High Yield .70% .65%
GSFM
Short Duration Government .65% .40%
Adjustable Rate Government .55% .40%
GSAMI
Global Income .90% .59%
</TABLE>
- ----------
* The Contractual Rate is identical to the aggregate advisory and
administration fee rates payable by each Fund under the previous separate
advisory (including subadvisory in the case of Global Income Fund) and
administration agreements. For the fiscal year ended October 31, 1996, the
annual rate expressed is the combined advisory and administration fees paid
(after
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<PAGE>
fee waivers). Such reduction or limits, if any, are calculated monthly on a
cumulative basis and may be discontinued or modified by the applicable
Adviser at its discretion at any time, although they have no current
intention to do so.
For the fiscal years ended October 31, 1996, 1995 and 1994, the amounts of
the investment advisory and administration fees incurred by each Fund then in
existence were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund $2,535,709 $2,947,492 $6,798,185
Short Duration Government 411,360 517,091 1,063,867
Fund/(1)/
Short Duration Tax-Free Fund 169,796 260,970 468,868
Core Fund/(2)/ 246,568 137,158 56,255
Global Income Fund/(3)(6)/ 1,117,226 706,460 1,518,814
Government Income Fund/(4)(6)/ 74,060 44,037 0
Municipal Income Fund/(5)(6)/ 211,283 154,707 35,494
</TABLE>
- ----------
/(1)/ Had expense limitations not been in effect, Short Duration Government Fund
would have paid advisory fees of $514,200, $646,364 and $1,329,834,
respectively, for such years.
/(2)/ Core Fund commenced operations January 5, 1994.
/(3)/ For the same periods, Global Income Fund paid GSAMI subadvisory fees of
$837,920, $1,412,921 and $3,037,627, respectively. If expense limitations
had not been in effect, Global Income Fund would have paid advisory and
subadvisory fees of $1,474,204 and $491,401, respectively, for the year
ended October 31, 1996 and $789,127 and $1,578,254, respectively, for the
year ended October 31, 1995.
/(4)/ Had expense limitations not been in effect, Government Income Fund would
have paid advisory fees of $148,120, $101,737 and $65,604, respectively,
for such years.
/(5)/ Had expense limitations not been in effect for the years ended October 31,
1995 and 1994, Municipal Income Fund would have paid advisory fees of
$200,207 and $174,161, respectively, for such years.
/(6)/ Reflects combined fees under separate investment advisory and
administration agreements which were combined in a Management Agreement
effective May 1, 1997.
The fees and services under the Investment Advisory and Administration
Agreements are identical to the fees and services under the Management
Agreement.
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<PAGE>
Each Adviser performs administrative services for the applicable Funds
under the Management Agreement. Such administrative services include, subject to
the general supervision of the Trustees of the Trust, (a) providing supervision
of all aspects of the Funds' non-investment operations (other than certain
operations performed by others pursuant to agreements with the Funds), (b)
providing the Funds, to the extent not provided pursuant to the agreement with
the Trust's custodian, transfer and dividend disbursing agent or agreements with
other institutions, with personnel to perform such executive, administrative and
clerical services as are reasonably necessary to provide effective
administration of the Funds, (c) arranging, to the extent not provided pursuant
to such agreements, for the preparation, at the Funds' expense, of each Fund's
tax returns, reports to shareholders, periodic updating of the Funds'
prospectuses and statements of additional information, and reports filed with
the SEC and other regulatory authorities, (d) providing the Funds, to the extent
not provided pursuant to such agreements, with adequate office space and certain
related office equipment and services, and (e) maintaining all of the Funds'
records other than those maintained pursuant to such agreements.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
-------------------------------------------------------------------------
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
- ----------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed-income markets, in each case on a proprietary basis and
for the accounts of customers. As such, Goldman Sachs and its affiliates are
actively engaged in transactions in the same securities, currencies, and
instruments in which the Funds invest. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which the
Funds invest, which could have an adverse impact on each Fund's performance.
Such transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the Advisers' and their advisory
affiliates' asset management activities, will be executed independently of the
Funds' transactions and thus at prices or rates that may be more or less
favorable. When the Advisers and their advisory affiliates seek to purchase or
sell the same assets for their managed accounts, including the Funds, the assets
actually purchased or sold may be
B-70
<PAGE>
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers, and/or their affiliates,
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which, or in securities of issuers for
which, the Advisers and/or their affiliates are performing services or when
position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities,
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
B-71
<PAGE>
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Advisers may enter into transactions and invest in instruments and, in
the case of Global Income, High Yield and Core Funds, currencies on behalf of
the applicable Funds in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of the Funds, and such party may
have no incentive to assure that the Funds obtain the best possible prices or
terms in connection with the transactions. Goldman Sachs and its affiliates may
also create, write or issue derivative instruments for customers of Goldman
Sachs or its affiliates, the underlying securities currencies or instruments of
which may be those in which the Funds invest or which may be based on the
performance of a Fund. The Funds may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Funds. At times, these activities may cause
departments of the Firm to give advice to clients that may cause these clients
to take actions adverse to the interest of the client. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arm's-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will
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<PAGE>
consider the effect of redemptions on a Fund and other shareholders in deciding
whether to redeem its shares.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
Goldman Sachs serves as the exclusive distributor of shares of the Funds
pursuant to a "best efforts" arrangement as provided by a distribution agreement
with the Trust dated April 30, 1997. Pursuant to the distribution agreement,
after the Funds' Prospectuses and periodic reports have been prepared, set in
type and mailed to shareholders, Goldman Sachs will pay for the printing and
distribution of copies thereof used in connection with the offering to
prospective investors. Goldman Sachs will also pay for other supplementary
sales literature and advertising costs. Goldman Sachs has entered into sales
agreements with certain investment dealers and financial service firms (the
"Authorized Dealers") to solicit subscriptions for Class A and Class B Shares of
each of the Funds that offer such classes of shares. Goldman Sachs receives a
portion of the sales load imposed on the sale, in the case of Class A Shares, or
redemption in the case of Class B Shares, of such Fund shares. No Class B Shares
were outstanding during the fiscal years ended October 31, 1994 and 1995.
Goldman Sachs retained approximately the following combined commissions on sales
of Class A and B shares during the following periods:
<TABLE>
<CAPTION>
1996** 1995* 1994
------ ------ ----
<S> <C> <C> <C>
Adjustable Rate Fund* $79,000 $40,000 N/A
Municipal Income Fund $24,900 $48,000 $ 76,000
Government Income Fund $17,300 $22,000 $ 5,000
Global Income Fund $52,600 $15,000 $350,000
</TABLE>
- ----------
* Prior to May 15, 1995 Adjustable Rate Fund did not offer Class A Shares.
** Prior to May 1, 1997, the Municipal, Government Income and Global Income
Funds did not offer Class B shares.
Goldman Sachs serves as the Trust's transfer and dividend disbursing agent.
Under its transfer agency agreement with the Trust, Goldman Sachs has undertaken
with the Trust with respect to each Fund to (i) record the issuance, transfer
and redemption of shares, (ii) provide confirmations of purchases and
redemptions, and quarterly statements, as well as certain other statements,
(iii) provide certain information to the Trust's custodian and the relevant
subcustodian in connection with redemptions, (iv) provide dividend crediting and
certain disbursing agent services, (v) maintain shareholder accounts, (vi)
provide certain state Blue Sky and other information, (vii) provide shareholders
and certain regulatory authorities with tax-related information, (viii) respond
to shareholder inquiries, and (ix) render certain other miscellaneous services.
B-73
<PAGE>
As compensation for the services rendered to the Trust by Goldman Sachs as
transfer and dividend disbursing agent and the assumption by Goldman Sachs of
the expenses related thereto, Goldman Sachs received fees for the fiscal years
ended October 31, 1996, 1995 and 1994 by each Fund then in existence as follows:
<TABLE>
<CAPTION>
Fund 1996 1995 1994
- ---- ---- ---- ----
<S> <C> <C> <C>
Adjustable Rate Fund 278,337 306,662 679,819
Short Duration Government Fund 0 0 0
Short Duration Tax-Free Fund 16,980 26,098 46,887
Core Fund/(1)/ 24,657 13,716 5,637
Global Income Fund 121,212 106,764 132,123
Municipal Income Fund 90,284 63,695 70,811
Government Income Fund 72,237 94,095 57,960
- ----------
</TABLE>
/(1)/ Core Fund commenced operations on January 5, 1994.
The foregoing distribution and transfer agency agreements each provide
that Goldman Sachs may render similar services to others so long as the services
each provides thereunder to the Funds are not impaired thereby. Each such
agreement also provides that the Trust will indemnify Goldman Sachs against
certain liabilities.
B-74
<PAGE>
EXPENSES
- --------
Except as set forth in the Prospectuses under "MANAGEMENT" the Trust, on
behalf of each Fund, is responsible for the payment of each Fund's respective
expenses. The expenses borne by the outstanding classes of each Fund include,
without limitation, the fees payable to the Adviser, the fees and expenses of
the Trust's custodian, transfer agent fees, brokerage fees and commissions,
filing fees for the registration or qualification of the Trust's shares under
federal or state securities laws, expenses of the organization of the Trust,
fees and expenses incurred by the Trust in connection with membership in
investment company organizations, taxes, interest, costs of liability insurance,
fidelity bonds or indemnification, any costs, expenses or losses arising out of
any liability of, or claim for damages or other relief asserted against, the
Trust for violation of any law, legal, tax and auditing fees and expenses
(including the cost of legal and certain accounting services rendered by
employees of Goldman Sachs, or its affiliates, with respect to the Trust),
expenses of preparing and setting in type Prospectuses, Additional Statements,
proxy material, reports and notices and the printing and distributing of the
same to the Trust's shareholders and regulatory authorities, fees under any
distribution, authorized dealer service, administration or service plans
applicable to a particular class, any compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the Trust.
Except for fees under any distribution, authorized dealer service,
administration or service plans applicable to a particular class and transfer
agency fees, all Fund expenses are borne on a non-class specific basis.
The Advisers voluntarily have agreed to reduce or otherwise limit certain
Other Expenses (excluding management fees, fees payable under administration,
distribution, service and authorized dealer service plans, taxes, interest,
brokerage fees and litigation, indemnification, transfer agency fees (in the
case of Global Income Fund and High Yield Fund) and other extraordinary
expenses) to the following percentage of each Fund's average daily net assets:
Short Duration Government Fund 0.05%
Adjustable Rate Fund 0.05%
Municipal Income Fund 0.05%
Government Income Fund 0.00%
Short Duration Tax-Free Fund 0.05%
Core Fund 0.05%
Global Income Fund 0.06%
High Yield Fund 0.01%
Such reductions or limits are calculated monthly on a cumulative
basis. Although the Advisers have no current intention of modifying or
discontinuing such expense limitations or the limitations on the management
fees, described above under "Management -- Investment Advisers," each may do so
in the future
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<PAGE>
at its discretion. For the fiscal year ended October 31, 1996, October 31, 1995
and October 31, 1994, Other Expenses of each Fund were reduced by the Advisers
in the following amounts:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund 386,863 551,405 442,880
Short Duration
Government Fund 169,069 219,994 115,389
Short Duration
Tax-Free Fund 238,097 213,139 192,696
Core Fund* 233,065 176,469 141,815
Municipal Income Fund 238,203 196,265 198,806
Government Income Fund 219,091 242,036 224,285
Global Income Fund** 337,079 70,195 0
</TABLE>
- ----------
* Core Fund commenced operations on January 5, 1994.
** For the fiscal year ended October 31, 1994, there was no expense
limitation.
Fees and expenses of legal counsel, registering shares of each Fund,
holding meetings and communicating with shareholders may include an allocable
portion of the cost of maintaining an internal legal and compliance department.
Each Fund may also bear an allocable portion of the costs incurred by the
Advisers in performing certain accounting services not being provided by the
Trust's custodian.
CUSTODIAN AND SUB-CUSTODIANS
- ----------------------------
State Street Bank and Trust Company ("State Street"), P.O. Box 1713,
Boston, Massachusetts 02105, is the custodian of the Trust's portfolio
securities and cash. State Street also maintains the Trust's accounting
records. State Street may appoint sub-custodians from time to time to hold
certain securities purchased by the Trust in foreign countries and to hold cash
and currencies for the Trust.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, One International
Place, Boston, Massachusetts 02110, have been selected as auditors of the Trust.
In addition to audit services, Arthur Andersen LLP prepares the Trust's federal
and state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS
The portfolio transactions for the Funds are generally effected at a net
price without a broker's commission (i.e., a dealer is dealing with a Fund as
principal and receives compensation equal to the spread between the dealer's
cost for a
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<PAGE>
given security and the resale price of such security). In certain foreign
countries, debt securities in which the Global Income Fund, Core Fund and High
Yield Fund may invest are traded on exchanges at fixed commission rates. In
connection with portfolio transactions, the Management Agreement provides that
the Advisers shall attempt to obtain the best net price and the most favorable
execution. The Management Agreement provides that, on occasions when an Adviser
deems the purchase or sale of a security to be in the best interests of a Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which the Advisers or an affiliate act as
investment adviser), a Fund, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net price and most favorable execution. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the applicable Adviser in the manner it considers
to be most equitable and consistent with its fiduciary obligations to the
applicable Fund and such other customers. In some instances, this procedure may
adversely affect the size and price of the position obtainable for a Fund. The
Management Agreement permits each Adviser, in its discretion, to purchase and
sell portfolio securities to and from dealers who provide the Trust with
brokerage or research services in which dealers may execute brokerage
transactions at a higher cost to the Fund. Brokerage and research services
furnished by firms through which the Fund's effect their securities transactions
may be used by the Advisers in servicing other accounts and not all of these
services may be used by the Adviser in connection with the specific Fund
generating the brokerage credits. The fees received under the Management
Agreement are not reduced by reason of the Adviser receiving such brokerage and
research services. In addition, in selecting brokers and dealers, the Advisers
may take into account sales of shares of the Funds and other funds in the
Goldman Sachs Group of Funds by such brokers and dealers.
For the fiscal years ended October 31, 1995 and 1994, the Funds then in
existence paid no brokerage commissions.
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<PAGE>
For the fiscal year ended October 31, 1996, the Funds then in existence paid
brokerage commissions as follows:
<TABLE>
<CAPTION>
Total Total Brokerage
Brokerage Amount of Commissions
Total Commissions Transaction Paid
Brokerage Paid to on which to Brokers
Commissions Affiliated Commissions Providing
Paid Persons Paid/3/ Research
=========== ================= ==================== ==============
<S> <C> <C> <C> <C>
Fiscal Year Ended
October 31, 1996:
Adjustable Rate Fund $108,000 $108,000(100%)/1/ $ 2,121,317,579(100%)/2/ $N/A
Short Duration Government Fund 24,000 24,000(100%)/1/ 447,205,928(100%)/2/ N/A
Short Duration Tax-Free Fund 1,000 1,000(100%)/1/ 8,559,280(100%)/2/ N/A
Core Fixed Income Fund 4,000 4,000(100%)/1/ 43,548,299(100%)/2/ N/A
Government Income Fund 1,200 1,200(100%)/1/ 24,437,288(100%)/2/ N/A
Municipal Income Fund 2,750 2,750(100%)/1/ 51,101,625(100%)/2/ N/A
</TABLE>
_______________________________
1 Percentage of total commissions paid.
2 Percentage of total amount of transactions involving the payment of
commissions effected through affiliated persons.
3 Refers to Market Value of Futures Contracts.
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<PAGE>
During the fiscal year ended October 31, 1996, the Funds acquired and
sold securities of their regular broker-dealers: Chase Securities, Inc., Lehman
Brothers, Inc., Salomon Brothers, Inc., Merrill Lynch, Robert W. Baird, Daiwa
Securities, J.P. Morgan & Co., Inc., Donaldson, Lufkin, Jenrette, Nomura
Securities and Morgan Stanley & Co.
At October 31, 1996, Short Duration Tax-Free Fund, Global Income Fund
and Municipal Income Fund held no securities of their regular broker-dealers.
As of the same date, Short Duration Government Fund, Adjustable Rate Fund,
Government Income Fund and Core Fund held the following amounts of securities of
their regular broker-dealers, as defined in Rule 10b-1 under the 1940 Act, or
their parents ($ in thousands): Short Duration Government Fund: Lehman
Brothers, Inc. ($370), Nomura Securities ($280) and Bear Stearns ($280);
Adjustable Rate Fund: Lehman Brothers, Inc. ($4,531), Bear Stearns ($3,430) and
Nomura Securities ($3,430); Government Income Fund: Lehman Brothers, Inc.
($2,774), Nomura Securities (2,774) and Bear Stearns ($2,100); Nomura Securities
(2,774); Core Fund: Lehman Brothers, Inc. ($4,808), Nomura Securities ($3,640)
and Bear Stearns ($3,640).
SHARES OF THE TRUST
The Funds were reorganized from series of a Massachusetts business
trust as part of Goldman Sachs Trust, a Delaware business trust, by a
Declaration of Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares
exists, each class or series must be preferred over all other classes or series
in respect of assets specifically allocated to such class or series. The
Trustees have authority to classify and reclassify any series of shares into one
or more classes of shares. As of the date of this Additional Statement, the
Trustees have authorized: (i) the issuance of five classes of shares of Short
Duration Government Fund, Short Duration Tax-Free Fund and Core Fund:
Institutional Shares, Administration Shares, Service Shares, Class A Shares and
Class B Shares; (ii) the issuance of four classes of shares of Adjustable Rate
Fund: Institutional Shares, Administration Shares, Service Shares and Class A
Shares; (iii) the issuance of four classes of shares of Global Income Fund and
High Yield Fund: Institutional Shares, Service Shares, Class A Shares and Class
B Shares; and (iv) the issuance of two classes of Municipal Income Fund and
Government Income Fund: Class A Shares and Class B Shares. As of October 31,
1996, no Service Shares of the Adjustable Rate Fund were outstanding; no Class A
or Class B shares of Short Duration Government Fund, Short Duration Tax-Free
Fund and Core Fund were outstanding; and no shares of High Yield Fund were
outstanding.
Each Institutional Share, Administration Share, Service Share, Class A
Share and Class B Share of a Fund represents a
B-79
<PAGE>
proportionate interest in the assets belonging to the applicable class of the
Fund. All expenses of a Fund are borne at the same rate by each class of
shares, except that fees under Administration and Service Plans are borne
exclusively by Administration and Service Shares, fees under Distribution and
Authorized Dealer Service Plans are borne exclusively by Class A Shares or Class
B Shares and transfer agency fees are borne at different rates by Class A Shares
or Class B Shares than Institutional, Administration and Service Shares. The
Trustees may determine in the future that it is appropriate to allocate other
expenses differently between classes of shares and may do so to the extent
consistent with the rules of the SEC and positions of the Internal Revenue
Service. Each class of shares may have different minimum investment
requirements and be entitled to different shareholder services. Currently,
shares of a class may only be exchanged for shares of the same or an equivalent
class of another fund. See "Exchange Privilege" in the Prospectus.
Institutional Shares may be purchased at net asset value without a
sales charge for accounts in the name of an investor or institution that is not
compensated by a Fund for services provided to the institution's customers.
Administration Shares may be purchased for accounts held in the name
of an institution that provides certain account administration services to its
customers, including maintenance of account records and processing orders to
purchase, redeem and exchange Administration Shares. Administration Shares bear
the cost of account administration fees at the annual rate of up to 0.25% of the
average daily net assets of such Administration Shares.
Service Shares may be purchased at net asset value without a sales
charge for accounts held in the name of an institution that, directly or
indirectly, provides certain account administration and shareholder liaison
services to its customers, including maintenance of account records and
processing orders to purchase, redeem and exchange Service Shares. Service
Shares bear the cost of account administration fees at the annual rate of up to
0.50% of the average daily net assets of the Fund attributable to Service
Shares.
Class A Shares are sold, with an initial sales charge, through brokers
and dealers who are members of the National Association of Securities Dealers,
Inc. and certain other financial service firms that have sales agreements with
Goldman Sachs. Class A Shares of the Funds bear the cost of distribution (Rule
12b-1) fees at the aggregate rate of up to 0.25% of the average daily net assets
of such Class A Shares. Class A Shares also bear the cost of an Authorized
Dealer Service Plan at an annual rate of up to 0.25% of average daily net assets
attributable to Class A Shares.
Class B Shares of the Funds are sold subject to a contingent deferred
sales charge through brokers and dealers who are members of the National
Association of Securities Dealers, Inc. and certain
B-80
<PAGE>
other financial services firms that have sales arrangements with Goldman Sachs.
Class B shares bear the cost of distribution (Rule 12b-1) fees at the aggregate
rate of up to 0.75% of the average daily net assets attributable to Class B
shares. Class B shares also bear the cost of an Authorized Dealer Service Plan
at an annual rate of up to 0.25% of the average daily net assets attributable to
Class B shares.
It is possible that an institution or its affiliate may offer
different classes of shares (i.e., Institutional, Administration, Service, Class
A and Class B Shares) to its customers and thus receive different compensation
with respect to different classes of shares of each Fund. Dividends paid by
each Fund, if any, with respect to each class of shares will be calculated in
the same manner, at the same time on the same day and will be in the same
amount, except for differences caused by the fact that the respective account
administration, service, authorized dealer service plan and distribution fees
relating to a particular class will be borne exclusively by that class.
Similarly, the net asset value per share may differ depending upon the class of
shares purchased.
Certain aspects of the shares may be altered, after advance notice to
shareholders, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, each Fund's shares are fully paid and non-assessable by
the Trust. In the event of liquidation of a Fund, shareholders of that Fund are
entitled to share pro rata in the net assets of that Fund available for
distribution to such shareholders. All shares entitle their holders to one vote
per share, are freely transferable and have no preemptive, subscription or
conversion rights.
As of April 1, 1997, the following entities and persons beneficially
owned 5% or more of the outstanding shares of the following Funds: Adjustable
Rate Fund -- First Security Bank of Idaho, FBO Idaho Housing Agency, P.O. Box
30007, Salt Lake City, UT (6.30%); First Trust of New York, N.A., Mr. Sean
Cullen, 100 Wall Street, Suite 1600, New York, NY (11.71%); Foundation for New
ERA Philanthropy, Arlin M. Adams, Trustee, 1600 Market Street, 36th Floor,
Philadelphia, PA 19102 (8.88%); Fundex Corporation, Attn: Mr. Mitsuru Hashimoto,
1875 S. Grant Street, Suite 1000, San Mateo, CA 94402-2671 (12.40%); State
Treasurer/Nebraska Investment Council, Attn: Gayle Ducker, 941 "O" Street,
Lincoln, NE 68508 (6.75%); Short Duration Government Fund -- Berko Accounts, 150
East 69th Street, New York, NY 10021-5704 (5.57%); Central Carolina Bank & Trust
Co., Mr. Norwood Thomas, Jr., Senior V.P. & T.O., P.O. Box 931, Durham, NC 27702
(7.49%); Norwest Bank Iowa NA, c/o Norwest Bank Minnesota NA, Attn: Betty
Gunderson, P.O. Box 1450 NW 6477, Minneapolis, MN 55400-1450 (7.26%); Richfield
Bank & Trust Co., Kirchbak Co., Attn: Judith A. Ferguson, 6625 Lyndale Avenue
South, Richfield, MN 55423 (12.48%); State Street Bank & Trust Co., Rena
Williams, P.O. Box 1992, Boston, MA 02105-992 (34.05%); Short Duration Tax-Free
Fund -- Donald R. Gant, Partner, Goldman, Sachs
B-81
<PAGE>
& Co., 85 Broad Street, 22nd Floor, New York, NY 10004 (15.63%); First
Interstate BK - Agent/Amer NB, Stratosphere Corp. Inden 3/9/95, Attn: Rose Robb,
3800 Howard Hughes Parkway, Las Vegas, NV 89193-8588 (8.12%); G-K-G, Inc.,
Bernard Gassin, 166 Oak Knoll Terrace, Highland Park, IL 60035 (9.23%); Indiana
Trust & Investment Management Co., Attn: Tina Taylor, 3930 Edison Lakes Parkway,
Suite 250, Mishawaka, IN 46545 (9.69%); Nelda Start, Attn: Mr. Walte Riedel,
P.O. Box 903, Orange, TX 77631-0909 (6.80%); Robert A. Cenci, Trust Trustee, GS
Profit Sharing Master Trust, Attn: Louis Pereira, P.O. Box 1992, Boston, MA
02105-1992 (16.08%); First National Bank of North Dakota, Attn: Josie Wahl, P.O.
Box 6001, Grand Forks, ND 58206-6001 (5.76%); Government Income Fund -Frontier
Trust Co. Inc. TR, FBO Dade County Public School, Attn: Agnes R. McMurray,
Fringe Benefits Management Co., 1720 S. Gadsden Street, Tallahassee, FL 32301-
5547 (9.52%); Charles Machine Works, Inc., ESOP & Trust Asset Allocation
Account, Mike Stodola, Trustee, P.O. Box 66, 1959 West Fir Street, Perry, OK
73077-5803 (7.42%); Bob Smith MD Foundation, 3811 Turtle Creek Centre #2150,
Dallas, TX 75219-4454 (6.60%); Core Fund -- Local 234 Electric Workers
Retirement Fund, Attn: Ronald D. Carpenter, 10300 Merritt Street, Castroville,
CA 95012 (7.20%).
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act, applicable state law or otherwise to the
holders of the outstanding voting securities of an investment company (such as
the Trust) shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially identical or the matter does not
affect any interest of such class or series. However, Rule 18f-2 exempts the
selection of independent public accountants, the approval of principal
distribution contracts and the election of Trustees from the separate voting
requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and
does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each share of the Trust will be entitled, as determined by
the Trustees, either to one vote for each share or to one vote for each dollar
of net asset value represented by such shares on all matters presented to
shareholders including the election of Trustees (this method of voting being
referred to at "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
B-82
<PAGE>
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees,
officers and agents of the Trust unless the recipient is adjudicated (i) to be
liable by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (ii)
not to have acted in good faith in the reasonable belief that such person's
actions were in the best interest of the Trust. The Declaration of Trust
provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not
because of the shareholder's acts or omissions or for some other reason, the
shareholder or former shareholder (or heirs, executors, administrators, legal
representatives or general successors) shall be held harmless from and
indemnified against all loss and expense arising from such liability. The
Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for
any act or obligation of the series and satisfy any judgment thereon from the
assets of the series.
The Declaration of Trust permits the termination of the Trust or of
any series or class of the Trust (i) by a majority of the affected shareholders
at a meeting of shareholders of the Trust, series or class; or (ii) by a
majority of the Trustees without shareholder approval if the Trustees determine
that such action is in the best interest of the Trust or its shareholders. The
factors and events that the Trustees may take into account in making such
determination include (i) the inability of the Trust or any successor series or
class to maintain its assets at an appropriate size; (ii) changes in laws or
regulations governing the Trust, series or class or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a
significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration
of Trust without a shareholder vote. However, shareholders of the Trust have
the right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
B-83
<PAGE>
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series
Trustees may, but are not required to, serve as Trustees of the Trust or any
other series or class of the Trust. The Series Trustees have, to the exclusion
of any other Trustees of the Delaware Trust, all the powers and authorities of
Trustees under the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the shareholders of the Funds are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust shareholder liability
exists in other states. As a result, to the extent that a Delaware business
trust or a shareholder is subject to the jurisdiction of courts of such other
states, the courts may not apply Delaware law and may thereby subject the
Delaware business trust shareholders to liability. To guard against this risk,
the Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of a Fund. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
series or the Trustees. The Declaration of Trust provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of a
obligation of the series. The Declaration of Trust also provides that a series
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the series and satisfy any judgment
thereon. In view of the above, the risk of personal liability of shareholders is
remote.
In addition to the requirement under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the series or class to which such action relates, shall join in the request for
the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis of other advisers in considering the merits of the request
and shall require an undertaking by the shareholders making such request to
reimburse the Fund for the expense of any such advisers in the event that the
Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not
be liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by
B-84
<PAGE>
reason or willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his or her office.
NET ASSET VALUE
Under the Act, the Trustees of the Trust are responsible for
determining in good faith the fair value of securities of the Funds. In
accordance with procedures adopted by the Trustees of the Trust, the net asset
value per share of each class of each Fund is calculated by determining the
value of the net assets attributable to each class of that Fund (assets,
including securities at value, minus liabilities) and dividing by the number of
outstanding shares of that class. All securities are valued as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m. New York
time) on each Business Day (as defined in each Fund's Prospectus).
For the purpose of calculating the net asset value of the Funds,
investments are valued under valuation procedures established by the Trustees.
Portfolio securities, other than money market instruments and with the exception
of Global Income Fund, for which accurate market quotations are readily
available are valued as follows: (a) via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; (b) securities for which the custodian bank is
unable to obtain an external price or with respect to which the Adviser believes
an external price does not reflect accurate market values, will be valued by the
Adviser in good faith based on valuation models that take into account daily
spread and yield changes on U.S. Treasury securities (i.e., matrix pricing); (c)
overnight repurchase agreements will be valued by the Adviser at cost; (d) term
repurchase agreements (i.e., those whose maturity exceeds seven days) and
interest rate swaps, caps, collars and floors will be valued at the average of
the bid quotations obtained daily from at least two dealers or, for term
repurchase agreements, recognized counterparties; (e) debt securities with a
remaining maturity of 60 days or less are valued by the Adviser at amortized
cost, which the Trustees have determined to approximate fair value; (f) spot and
forward foreign currency exchange contracts will be valued using a pricing
service such as Reuters then calculating then mean between the last bid and
asked quotations supplied by certain independent dealers in such contracts; (g)
exchange-traded options and futures contracts will be valued by the custodian
bank at the last sale price on the exchange where such contracts and options are
principally traded; and (h) over-the-counter options will be valued by an
independent unaffiliated broker identified by the portfolio manager/trader and
contacted by the custodian bank.
Portfolio securities of the Global Income Fund for which accurate
market quotations are available are valued as follows: (a) securities listed on
any U.S. or foreign stock exchange or on
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<PAGE>
the National Association of Securities Dealers Automated Quotations System
("NASDAQ") will be valued at the last sale price on the exchange or system in
which they are principally traded, on the valuation date. If there is no sale on
the valuation day, securities traded principally: (i) on a U.S. exchange or
NASDAQ will be valued at the mean between the closing bid and asked prices, and
(ii) on a foreign exchange will be valued at the official bid price. The last
sale price and official bid price for securities traded principally on a foreign
exchange will be determined as of the close of the London Foreign Exchange; (b)
over-the-counter securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the mean between the last
bid and asked prices; (c) options and futures contracts will be valued at the
last sale price in the market where such contract is principally traded; and (d)
forward foreign currency exchange contracts will be valued at the mean between
the last bid and asked quotations supplied by a dealer in such contracts.
All other securities, including those for which a pricing service
supplies no exchange quotation or a quotation that is believed by the portfolio
manager/trader to be inaccurate; will be valued at fair value as stated in the
valuation procedures which were approved by the Board of Trustees.
Money market instruments held by a Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which the
Trustees have determined approximates market value.
The value of all assets and liabilities expressed in foreign
currencies will be converted into U.S. dollar values at current exchange rates
of such currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in foreign securities is substantially completed
each day at various times prior to the time the Global Income, Core and High
Yield Funds calculate their net asset value. Occasionally, events affecting the
values of such securities may occur between the times at which they are
determined and the calculation of net asset value which will not be reflected in
the computation of the Fund's net asset value unless the Trustees deem that such
event would materially affect the net asset value, in which case an adjustment
may be made.
TAXATION
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in the Funds. This summary does not address special
tax rules applicable to certain classes of investors, such as tax-exempt
entities,
B-86
<PAGE>
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in the Funds. This
summary is based on the laws in effect on the date of this Additional Statement,
which are subject to change.
GENERAL
- -------
Each series of the Trust, including each Fund, is a separate taxable
entity. Each Fund has qualified and elected or intends to qualify and elect to
be treated and intends to continue to qualify for each taxable year as a
regulated investment company under Subchapter M of the Code.
Qualification as a regulated investment company under the Code
requires, among other things, that (a) a Fund derive at least 90% of its gross
income (including tax-exempt interest) for its taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stocks or securities, or foreign currencies or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"); (b) a Fund derive less than 30% of its
gross income for its taxable year from the sale or other disposition of any of
the following which was held for less than three months: (i) stock or
securities, (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies) and (iii) foreign currencies
and foreign currency options, futures and forward contracts that are not
directly related to the Fund's principal business of investing in stocks or
securities or options and futures with respect to stocks or securities (the
"short-short test"); and (c) a Fund diversify its holdings so that, at the close
of each quarter of its taxable year, (i) at least 50% of the market value of its
total (gross) assets is comprised of cash, cash items, United States Government
Securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of the Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than United States Government Securities and securities of
other regulated investment companies) or two or more issuers controlled by a
Fund and engaged in the same, similar or related trades or businesses. Gains
from the sale or other disposition of foreign currencies (or options, futures or
forward contracts on foreign currencies) that are not directly related to Core
Fund's or Global Income Fund's principal business of investing in stock or
securities or options and futures with respect to stock or securities will be
treated as gains from the sale of investments held for less than three months
under the short-short test (even though characterized as ordinary income for
some purposes) if such currencies or instruments were held for less than three
months. In
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<PAGE>
addition, future Treasury regulations could provide that qualifying income under
the 90% gross income test will not include gains from foreign currency
transactions that are not directly related to Core Fund's or Global Income
Fund's principal business of investing in stock or securities or options and
futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward contracts for
purposes other than hedging currency risk with respect to securities in Core
Fund's or Global Income Fund's portfolio or anticipated to be acquired may not
qualify as "directly related" under these tests.
As a regulated investment company, a Fund will not be subject to U.S.
federal income tax on the portion of its income and capital gains that it
distributes to its shareholders in any taxable year for which it distributes, in
compliance with the Code's timing and other requirements, at least 90% of its
"investment company taxable income" (which includes dividends, taxable interest,
taxable original issue discount income, market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss, certain net realized foreign exchange gains, and any other taxable
income other than "net capital gain" as defined below and is reduced by
deductible expenses) and at least 90% of the excess of its gross tax-exempt
interest income over certain disallowed deductions ("net tax-exempt interest").
A Fund may retain for investment its "net capital gain" (which consists of the
excess of its net long-term capital gain over its net short-term capital loss).
However, if a Fund retains any investment company taxable income or net capital
gain, it will be subject to tax at regular corporate rates on the amount
retained. If a Fund retains any net capital gain, that Fund may designate the
retained amount as undistributed net capital gain in a notice to its
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for federal income tax
purposes, as long-term capital gain, their shares of such undistributed amount,
and (ii) will be entitled to credit their proportionate shares of the tax paid
by that Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For U.S.
federal income tax purposes, the tax basis of shares owned by a shareholder of
the Fund will be increased by an amount equal under current law to 65% of the
amount of undistributed net capital gain included in the shareholder's gross
income. Each Fund intends to distribute for each taxable year to its
shareholders all or substantially all of its investment company taxable income
(if any), net capital gain and any net tax-exempt interest. Exchange control or
other foreign laws, regulations or practices may restrict repatriation of
investment income, capital or the proceeds of securities sales by foreign
investors such as Global Income Fund or Core Fund and may therefore make it more
difficult for Global Income Fund or Core Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, Global Income Fund and Core Fund
generally expect to be able to obtain sufficient cash to satisfy such
requirements from new investors, the sale of
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<PAGE>
securities or other sources. If for any taxable year a Fund does not qualify as
a regulated investment company, it will be taxed on all of its investment
company taxable income and net capital gain at corporate rates, its net tax-
exempt interest (if any) may be subject to the alternative minimum tax, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
For federal income tax purposes, each Fund is permitted to carry
forward a net capital loss in any year to offset its own capital gains, if any,
during the eight years following the year of the loss. At October 31, 1996, the
Funds had approximately the following amounts of capital loss carry forwards:
<TABLE>
<CAPTION>
Years of
Amount Expiration
----------- ----------
<S> <C> <C>
Adjustable Rate Fund $47,923,000 2000-2003
Short Duration
Government Fund $13,272,000 2002-2003
Short Duration
Tax-Free Fund $ 4,271,000 2002-2003
Core Fixed Income Fund $ 77,000 2004
Global Income Fund $ 4,472,000 2002
Municipal Income Fund $ 1,535,000 2002
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by the Code and applicable tax regulations.
In order to avoid a 4% federal excise tax, each Fund must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year) and 100% of any taxable
ordinary income and the excess of capital gains over capital losses for the
prior year that were not distributed during such year and on which the Fund did
not pay federal income tax. The Funds anticipate that they will generally make
timely distributions of income and capital gains in compliance with these
requirements so that they will generally not be required to pay the excise tax.
For federal income tax purposes, dividends declared by a Fund in October,
November or December as of a record date in such a month which are actually paid
in January of the following year will be treated as if they were received by
shareholders on December 31 of the year declared.
The Tax Exempt Funds may purchase Municipal Securities together with the
right to resell the securities to the seller at an agreed-upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby
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commitment." The Tax Exempt Funds may pay for a standby commitment either
separately, in cash, or in the form of a higher price for the securities which
are acquired subject to the standby commitment, thus increasing the cost of
securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Funds may purchase beneficial interests in Municipal Securities held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts and other types of features such as interest rate swaps; those investments
may require the Fund to pay "tender fees" or other fees for the various features
provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that tax-
exempt interest received by a regulated investment company with respect to such
obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax Exempt Funds intends to take
the position that it is the owner of any municipal obligations acquired subject
to a standby commitment or other third party put and that tax-exempt interest
earned with respect to such municipal obligations will be tax-exempt in its
hands. There is no assurance that the Service will agree with such position in
any particular case. Additionally, the federal income tax treatment of certain
other aspects of these investments, including the treatment of tender fees paid
by these Funds, in relation to various regulated investment company tax
provisions is unclear. However, the Adviser intends to manage the Tax Exempt
Funds' portfolios in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gain and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging
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transactions entered into by a Fund, that Fund may be required to defer the
recognition of losses on futures or forward contracts and options or underlying
securities or foreign currencies to the extent of any unrecognized gains on
related positions held by the Fund and the characterization of gains or losses
as long-term or short-term may be changed. The short-short test described above
may limit each Fund's ability to use options, futures and forward transactions
as well as its ability to engage in short sales. The tax provisions described
above applicable to options, futures and forward contracts may affect the
amount, timing, and character of a Fund's distributions to shareholders. Certain
tax elections may be available to the Funds to mitigate some of the unfavorable
consequences described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by Core Fund and Global Income
Fund. Under these rules, foreign exchange gain or loss realized by Core Fund or
Global Income Fund with respect to foreign currencies and certain futures and
options thereon, foreign currency-denominated debt instruments, foreign currency
forward contracts, and foreign currency-denominated payables and receivables
will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign
exchange loss treated as ordinary loss under Section 988 of the Code were to
exceed a Fund's investment company taxable income (computed without regard to
such loss) for a taxable year, the resulting loss would not be deductible by
the Fund or its shareholders in future years. Net loss, if any, from certain
foreign currency transactions or instruments could exceed net investment income
otherwise calculated for accounting purposes with the result being either no
dividends being paid or a portion of Core Fund's, High Yield Fund's or Global
Income Fund's dividends being treated as a return of capital for tax purposes,
nontaxable to the extent of a shareholder's tax basis in his shares and, once
such basis is exhausted, generally giving rise to capital gains.
Core and Global Income, and High Yield Funds may be subject to foreign
taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. Because more than 50% of Global Income
Fund's total assets at the close of any taxable year will generally consist of
stock or securities of foreign corporations, Global Income Fund will generally
qualify to file an election with the Internal Revenue Service pursuant to which
shareholders of Global Income Fund would be required to (i) include in ordinary
gross income (in addition to taxable dividends actually received) their pro rata
shares of foreign income taxes paid by Global Income Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them. Global Income Fund may or may
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not make this election for any particular taxable year. Core Fund will not
satisfy the 50% requirement described above and, therefore, will not make this
election. Core Fund and, if it does not make the election, Global Income Fund
will, however, be entitled to deduct such taxes in computing the amounts they
are required to distribute.
If Global Income Fund makes this election, its shareholders may then deduct
such pro rata portions of qualified foreign taxes in computing their taxable
incomes, or, alternatively, use them as foreign tax credits, subject to
applicable limitations, against their U.S. federal income taxes. Shareholders
who do not itemize deductions for federal income tax purposes will not, however,
be able to deduct their pro rata portion of qualified foreign taxes paid by
Global Income Fund, although such shareholders will be required to include their
shares of such taxes in gross income if Global Income Fund makes the election
referred to above.
If a shareholder chooses to take a credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by Global Income Fund, the
amount of the credit that may be claimed in any year may not exceed the same
proportion of the U.S. tax against which such credit is taken which the
shareholder's taxable income from foreign sources (but not in excess of the
shareholder's entire taxable income) bears to his entire taxable income. For
this purpose, distributions from long-term and short-term capital gains or
foreign currency gains by Global Income Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of Global Income Fund may not be able to claim a credit for the
full amount of their proportionate shares of the foreign taxes paid by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that Global Income Fund files the election described above, its
shareholders will be notified of the amount of (i) each shareholder's pro rata
share of qualified foreign income taxes paid by Global Income Fund and (ii) the
portion of Fund dividends which represents income from each foreign country.
If Core, or Global Income or High Yield Funds acquire stock (including,
under proposed regulations, an option to acquire stock such as is inherent in a
convertible bond) in certain foreign corporations that receive at least 75% of
their annual gross income from passive sources (such as interest, dividends,
rents, royalties or capital gain) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies") Core, Global Income or High Yield Funds could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such
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companies or gain from the sale of such stock in such companies, even if all
income or gain actually received by Core, Global Income or High Yield Funds is
timely distributed to its shareholders. Core, Global Income or High Yield Funds
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require Core, Global Income or
High Yield Funds to recognize taxable income or gain without the concurrent
receipt of cash. Core, Global Income or High Yield Funds may limit and/or manage
their holdings in passive foreign investment companies to minimize its tax
liability or maximize its return from these investments.
A Fund's investment in zero coupon securities, deferred interest
securities, capital appreciation bonds or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark-to-market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, a Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate and currency swaps, floors, caps and collars are unclear in
certain respects, and a Fund may also be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments.
TAXABLE U.S. SHAREHOLDERS -- DISTRIBUTIONS
TAX EXEMPT FUNDS. Each Tax Exempt Fund expects to qualify to pay "exempt-
interest dividends," as defined in the Code. To qualify to pay exempt-interest
dividends, the applicable Fund must, at the close of each quarter of its taxable
year, have at least 50% of the value of its total assets invested in Municipal
Securities whose interest is excluded from gross income under Section 103(a) of
the Code. In purchasing Municipal Securities, each Tax Exempt Fund intends to
rely on opinions of nationally recognized bond counsel for each issue as to the
excludability of interest on such obligations from gross income for federal
income tax purposes. A Tax Exempt Fund will not undertake independent
investigations concerning the tax-exempt status of such obligations, nor does it
guarantee or represent that bond counsels' opinions are correct. Bond counsels'
opinions will generally be based in part upon covenants by the issuers and
related parties regarding continuing compliance with federal tax requirements.
Tax laws not only limit the purposes for which tax-exempt bonds may be issued
and the supply of such bonds, but also contain numerous and complex
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requirements that must be satisfied on a continuing basis in order for bonds to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed
facility fails to comply with such requirements at any time, interest on the
bond could become taxable, retroactive to the date the obligation was issued. In
that event, a portion of a Tax Exempt Fund's distributions attributable to
interest the Fund received on such bond for the current year and for prior years
could be characterized or recharacterized as taxable income. The availability of
tax-exempt obligations and the value of a Tax Exempt Fund's portfolio may be
affected by restrictive federal income tax legislation enacted in recent years
or by similar, future legislation. If a Tax Exempt Fund satisfies the applicable
requirements, dividends paid by the Fund which are attributable to tax exempt
interest on Municipal Securities and designated by the Fund as exempt-interest
dividends in a written notice mailed to its shareholders within sixty days after
the close of its taxable year may be treated by shareholders as items of
interest excludable from their gross income under Section 103(a) of the Code.
Exempt-interest dividends a Tax Exempt Fund receives from other regulated
investment companies, including exempt-interest dividends on auction rate
preferred securities of such companies held by a Fund, are treated as interest
on Municipal Securities and may be distributed by a Tax Exempt Fund as exempt-
interest dividends. The recipient of tax-exempt income is required to report
such income on his federal income tax return. However, a shareholder is advised
to consult his tax adviser with respect to whether exempt-interest dividends
retain the exclusion under Section 103(a) if such shareholder would be treated
as a "substantial user" under Section 147(a)(1) with respect to some or all of
the tax-exempt obligations held by a Tax Exempt Fund. The Code provides that
interest on indebtedness incurred or continued to purchase or carry shares of a
Tax Exempt Fund is not deductible to the extent attributable to exempt-interest
dividends.
Although all or a substantial portion of the dividends paid by a Tax Exempt
Fund may be excluded by shareholders of such Fund from their gross income for
federal income tax purposes, each Tax Exempt Fund may purchase specified private
activity bonds, the interest from which (including a Fund's distributions
attributable to such interest) may be a preference item for purposes of the
federal alternative minimum tax (both individual and corporate). All exempt-
interest dividends from a Tax Exempt Fund, whether or not attributable to
private activity bond interest, may increase a corporate shareholder's
liability, if any, for corporate alternative minimum tax, and will be taken into
account in determining the extent to which a shareholder's Social Security or
certain railroad retirement benefits are taxable.
ALL FUNDS. Distributions from investment company taxable income, as
defined above, are taxable to shareholders who are subject to tax as ordinary
income whether paid in cash or reinvested in additional shares. Taxable
distributions include distributions from any Fund, including Short Duration Tax-
Free Fund and Municipal Income Fund, that are attributable to (i) taxable
income, including but not limited to dividends, taxable bond
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interest, recognized market discount income, original issue discount income
accrued with respect to taxable bonds, income from repurchase agreements, income
from securities lending, income from dollar rolls, income from interest rate or
currency swaps, caps, floors and collars, and a portion of the discount from
certain stripped tax-exempt obligations or their coupons or (ii) capital gains
from the sale of securities or other investments (including from the disposition
of rights to when-issued securities prior to issuance) or from options, futures
or certain forward contracts. Any portion of such taxable distributions that is
attributable to a Fund's net capital gain, as defined above, may be designated
by the Fund as a "capital gain dividend," taxable to shareholders as long-term
capital gain whether received in cash or additional shares and regardless of the
length of time their shares of a Fund have been held.
It is expected that distributions made by the Funds will ordinarily not
qualify for the dividends-received deduction for corporations because qualifying
distributions may be made only from a Fund's dividend income that it receives
from stock in U.S. domestic corporations. The Funds do not intend to purchase
stock of domestic corporations other than in limited instances, including
investments in investment companies, distributions from which may in rare cases
qualify as dividends for this purpose. The dividends-received deduction, if
available, is reduced to the extent the shares with respect to which the
dividends are received are treated as debt-financed under the federal income tax
law and is eliminated if the shares are deemed to have been held for less than a
minimum period, generally 46 days. Receipt of certain distributions qualifying
for the deduction may result in reduction of the tax basis of the corporate
shareholder's shares and may give rise to or increase its liability for federal
corporate alternative minimum tax.
Distributions in excess of a Fund's current and accumulated earnings and
profits, as computed for federal income tax purposes,
will first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, will generally constitute capital gains
to a shareholder who holds his shares as capital assets. Amounts that are not
allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce a Fund's
current earnings and profits for these purposes. Consequently, the portion, if
any, of Short Duration Tax-Free Fund's or Municipal Income Fund's distributions
from gross tax-exempt interest income that exceeds its net tax-exempt interest
would be taxable as ordinary income to the extent of such disallowed deductions
even though such excess portion may represent an economic return of capital.
Shareholders receiving a distribution in the form of newly issued shares
will be treated for U.S. federal income tax purposes as receiving a distribution
in an amount equal to the amount of cash that they would have received had they
elected to receive cash
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and will have a cost basis in the shares received equal to such amount.
TAXABLE U.S. SHAREHOLDERS -- SALE OF SHARES
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and long-term if the shareholder has a tax holding period for the
shares of more than one year, otherwise short-term, subject to the rules
described below. Shareholders should consult their own tax advisers with
reference to their particular circumstances to determine whether a redemption
(including an exchange) or other disposition of Fund Shares is properly treated
as a sale for tax purposes, as is assumed in this discussion. All or a portion
of a sales charge paid in purchasing Class A shares of Adjustable Rate Fund or
Global Income Fund cannot be taken into account for purposes of determining gain
or loss on the redemption or exchange of such shares within 90 days after their
purchase to the extent shares of that Fund or another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. If
a shareholder received a capital gain dividend with respect to shares and such
shares have a tax holding period of six months or less at the time of the sale
or redemption, then any loss the shareholder realizes on the sale or redemption
will be treated as a long-term capital loss to the extent of such capital gain
dividend. Also, any losses realized by shareholders who dispose of shares of
Short Duration Tax-Free or Municipal Income Funds with a tax holding period of
six months or less are disallowed to the extent of any exempt-interest dividends
received with respect to such shares. Additionally, any loss realized on a sale
or redemption of shares of a Fund may be disallowed under "wash sale" rules to
the extent the shares disposed of are replaced with other shares of the same
Fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to a dividend reinvestment in
shares of the Fund. If disallowed, the loss will be reflected in an adjustment
to the basis of the shares acquired.
After the close of each calendar year, each of Short Duration Tax-Free Fund
and Municipal Income Fund will inform shareholders of the federal income tax
status of its dividends and distributions for such year, including the portion
of such dividends that qualifies as tax-exempt and the portion, if any, that
should be treated as a tax preference item for purposes of the federal
alternative minimum tax. Shareholders who have not held shares of Short
Duration Tax-Free Fund or Municipal Income Fund for such Fund's full taxable
year may have designated as tax-exempt or as a
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tax preference item a percentage of distributions which is not equal to the
actual amount of tax-exempt income or tax preference item income earned by Short
Duration Tax-Free Fund or Municipal Income Fund during the period of their
investment in Short Duration Tax-Free Fund or Municipal Income Fund, as the case
may be.
All distributions, whether received in shares or in cash, as well as
redemptions and exchanges, must be reported by each shareholder who is required
to file a U.S. Federal income tax return.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
BACKUP WITHHOLDING
Each Fund will be required to report to the Service all taxable
distributions, as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt recipients, i.e., corporations and
certain other investors distributions to which are exempt from the information
reporting provisions of the Code. Under the backup withholding provisions of
Code Section 3406 and applicable Treasury regulations, all such reportable
distributions and proceeds may be subject to backup withholding of federal
income tax at the rate of 31% in the case of non-exempt shareholders who fail to
furnish the Funds with their correct taxpayer identification number and with
certain required certifications or if the Service or a broker notifies the Funds
that the number furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from Short
Duration Tax-Free Fund or Municipal Income Fund will not be subject to backup
withholding if the applicable Fund reasonably estimates that at least 95% of its
distributions will be exempt-interest dividends. A Fund may refuse to accept an
application that does not contain any required taxpayer identification number or
certification that the number provided is correct. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in shares, will be reduced by the amounts required to be
withheld. Any amounts withheld may be credited against a shareholder's U.S.
federal income tax liability. Investors should consult their tax advisers about
the applicability of the backup withholding provisions.
NON-U.S. SHAREHOLDERS
The foregoing discussion relates solely to U.S. federal income tax law as
it applies to "U.S. persons" (i.e., U.S. citizens and residents and U.S.
domestic corporations, partnerships, trusts and estates) subject to tax under
such law. Dividends from investment
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company taxable income distributed by a Fund to a shareholder who is not a U.S.
person will be subject to U.S. withholding tax at the rate of 30% (or a lower
rate provided by an applicable tax treaty) unless the dividends are effectively
connected with a U.S. trade or business of the shareholder, in which case the
dividends will be subject to tax on a net income basis at the graduated rates
applicable to U.S. individuals or domestic corporations. Distributions of net
capital gain, including amounts retained by a Fund which are designated as
undistributed capital gains, to a shareholder who is not a U.S. person will not
be subject to U.S. federal income or withholding tax unless the distributions
are effectively connected with the shareholder's trade or business in the United
States or, in the case of a shareholder who is a nonresident alien individual,
the shareholder is present in the United States for 183 days or more during the
taxable year and certain other conditions are met. Non-U.S. shareholders may
also be subject to U.S. withholding tax on deemed income resulting from any
election by Global Income Fund to treat qualified foreign taxes it pays as
passed through to shareholders (as described above), but they may not be able to
claim a U.S. tax credit or deduction with respect to such taxes.
Any capital gain realized by a shareholder who is not a U.S. person upon a
sale or redemption of shares of a Fund will not be subject to U.S. federal
income or withholding tax unless the gain is effectively connected with the
shareholder's trade or business in the United States, or in the case of a
shareholder who is a nonresident alien individual, the shareholder is present in
the United States for 183 days or more during the taxable year and certain other
conditions are met.
Non-U.S. persons who fail to furnish a Fund with an IRS Form W-8 or
acceptable substitute may be subject to backup withholding at the rate of 31% on
capital gain dividends and the proceeds of redemptions and exchanges. Each
shareholder who is not a U.S. person should consult his or her tax adviser
regarding the U.S. and non-U.S. tax consequences of ownership of shares of and
receipt of distributions from a Fund.
STATE AND LOCAL TAXES
A Fund may be subject to state or local taxes in certain jurisdictions in
which the Fund may be deemed to be doing business. In addition, in those states
or localities which have income tax laws, the treatment of a Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in a Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
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PERFORMANCE INFORMATION
Each Fund may from time to time quote or otherwise use yield and total
return information in advertisements, shareholder reports or sales literature.
Thirty-day yield and average annual total return values are computed pursuant to
formulas specified by the SEC. Each Fund may also from time to time quote
distribution rates in reports to shareholders and in sales literature.
Thirty-day yield is derived by dividing net investment income per share
earned during the period by the maximum public offering price per share on the
last day of such period. Yield is then annualized by assuming that yield is
realized each month for twelve months and is reinvested every six months. Net
investment income per share is equal to the dividends and interest earned during
the period, reduced by accrued expenses for the period. The calculation of net
investment income for these purposes may differ from the net investment income
determined for accounting purposes.
Tax equivalent yield represents the yield an investor would have to earn to
equal, after taxes, a Tax Exempt Fund's tax-free yield. Tax equivalent yield is
calculated by dividing a Tax Exempt Fund's tax-exempt yield by one minus a
stated federal and/or state tax rate.
Distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share on the last day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price applicable to the relevant
class (i.e., net asset value in the case of each class other than Class A) at
the beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount, assuming a redemption (and in the case
of Class B Shares payment of any contingent deferred sales charge) at the end of
the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price per share with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
The following table presents thirty-day yield, tax equivalent yield (Short
Duration Tax-Free and Municipal Income Funds only), distribution rate and
average annual total return (capital plus reinvestment of all distributions) for
each class of shares outstanding for the periods indicated.
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Thirty-day yield, tax equivalent yield (Short Duration Tax-Free and
Municipal Income Funds only), distribution rate and average annual total return
are calculated separately for each class of shares in existence of each Fund.
Each class of shares of each Fund is subject to different fees and expenses and
may have different returns for the same period. Any performance data for Class A
or Class B Shares which is based upon a Fund's net asset value per share would
be reduced if a sales charge were taken into account.
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<PAGE>
YIELD
<TABLE>
<CAPTION>
Investment SEC 30-Day Pro-Forma
Fund Period Yield Yield/1/
- ---- ----------- ----------- ---------
<S> <C> <C> <C>
30-Days
ended
10/31/96
ADJUSTABLE RATE FUND
Institutional Shares 6.00% 5.94%
Administration Shares 5.75% 5.69%
Service Shares/2/
Class A Shares
- Assumes 1.5% sales charge 5.66% 5.35%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.43% 6.16%
Administration Shares 6.19% 5.93%
Service Shares 5.96% 5.71%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.34% 3.71%
Administration Shares 4.09% 3.42%
Service Shares 3.84% 3.22%
CORE FUND
Institutional Shares 6.60% 6.25%
Administration Shares 6.37% 6.03%
Service Shares 6.12% 5.78%
GLOBAL INCOME FUND
Institutional Shares 5.20% 4.76%
Service Shares/2/
Class A Shares
(Assumes 4.5% sales charge) 4.54% 4.08%
Class B Shares 4.23% 3.80%
MUNICIPAL INCOME FUND
Class A Shares 4.21% 3.56%
(assumes 4.5% sales charge)
Class B Shares 3.68% 3.25%
GOVERNMENT INCOME FUND
Class A Shares 6.04% 4.76%
(assumes 4.5% sales charge)
Class B Shares 5.57% 4.48%
</TABLE>
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DISTRIBUTION RATE
<TABLE>
<CAPTION>
30 Day Pro-Forma
Investment Distribution Distribution
Fund Period Rate Rate/1/
- ---- ----------- ----------- ------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 5.87% 5.81%
Administration Shares 5.62% 5.56%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.62% 5.31%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 6.24% 5.97%
Administration Shares 6.00% 5.72%
Service Shares 5.78% 5.49%
SHORT DURATION TAX-FREE FUND
Institutional Shares 4.19% 3.56%
Administration Shares 3.94% 3.28%
Service Shares 3.69% 3.06%
MUNICIPAL INCOME FUND
Class A Shares 4.27% 3.59%
-assumes no sales charge
Class B Shares 3.53% 3.09%
GOVERNMENT INCOME FUND
Class A Shares 6.33% 5.00%
-assumes no sales charge
Class B Shares 5.58% 4.50%
CORE FUND
Institutional Shares 6.46% 6.12%
Administration Shares 6.23% 5.89%
Service Shares 5.98% 5.63%
GLOBAL INCOME FUND
Institutional Fund 5.95% 6.18%
Service Shares/2/
Class A Shares
- Assumes no sales charge 5.44% 4.96%
Class B Shares 5.02% 4.59%
</TABLE>
B-102
<PAGE>
TAX-EQUIVALENT YIELD/6/
<TABLE>
<CAPTION>
Pro-Forma
Investment Tax-Equivalent Tax-Equivalent
Fund Period Rate Yield/1/
- ---- ---------- -------------- --------------
30-Days
ended
10/31/96
<S> <C> <C> <C>
SHORT DURATION
TAX-FREE FUND/3/
Institutional Shares 6.94% 5.89%
Administration Shares 6.52% 5.43%
Service Shares 6.11% 5.07%
MUNICIPAL INCOME FUND/3/
Class A Shares 7.07% 5.94%
-assumes no sales charge
Class B Shares 5.84% 5.12%
</TABLE>
- ----------
1 Yield, tax equivalent yield and distribution rate if the applicable Adviser
had not voluntarily agreed to limit its advisory fees and to maintain
expenses at a specified level.
2 There were no Service Shares outstanding during the periods indicated.
3 The tax-equivalent rate of Short Duration Tax-Free Fund and Municipal
Income Fund is computed based on the 39.6% federal income tax rate.
The above tables should not be considered a representation of future
performance.
B-103
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------------- ----------- ----------------- ------------ ---------------
<S> <C> <C> <C> <C>
ADJUSTABLE RATE FUND
Institutional Shares 7/17/91/1a/ ended 10/31/96 5.32% 5.19%
11/1/95 one year ended
10/31/96 6.86% 6.80%
11/1/91 five years ended
10/31/96 5.13% 5.05%
Administration Shares 4/15/93/1b/ ended 10/31/96 4.69% 4.64%
11/1/95 one year ended
10/31/96 6.60% 6.53%
Service Shares/1c/ N/A N/A
Class A Shares 5/12/95/1d/ ended 10/31/96
Assumes 1.5% Sales Charge 5.29% 4.96%
Assumes No Sales Charge 6.40% 6.07%
11/1/95 one year ended
Assumes 1.5% Sales Charge 10/31/96 4.99% 4.66%
Assumes No Sales Charge 6.60% 6.27%
SHORT DURATION GOVERNMENT FUND
Institutional Shares 8/15/88/2a/ ended 10/31/96 7.24% 6.84%
11/1/95 one year ended
10/31/96 6.75% 6.47%
11/1/91 five years
ended 10/31/96 5.67% 5.44%
Administration Shares 2/28/96/2b/ ended 10/31/96 4.00% 3.82%
Service Shares 4/10/96/2b/ ended 10/31/96 4.35% 4.20%
</TABLE>
B-104
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ------------------------------ ----------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
SHORT DURATION TAX-FREE FUND
Institutional Shares 10/1/92/3a/ ended 10/31/96 4.21% 3.71%
11/1/95 one year ended
10/31/96 4.50% 3.92%
Administration Shares 5/20/93/3b/ ended 10/31/96 3.51% 3.15%
11/1/95 one year ended
10/31/96 4.24% 3.66%
Service Shares 9/20/94/3c/ ended 10/31/96 4.36% 3.92%
11/1/95 one year ended
10/31/96 3.98% 3.40%
CORE FUND
Institutional Shares 1/15/94/4a/ 10/31/96 6.34% 5.70%
11/1/95 one year ended
10/31/96 5.98% 5.58%
Administration Shares 2/28/96/4b/ ended
10/31/96 3.56% 3.29%
Service Shares 3/13/96/4b/ ended
10/31/96 4.90% 4.69%
</TABLE>
B-105
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- ---- ----------- ------------------- --------------- ------------
<S> <C> <C> <C> <C>
GLOBAL INCOME FUND/5C/
Class A Shares 8/2/91/5a/ ended 10/31/96
Assumes 4.5% Sales Charge 7.08% 6.76%
Assumes No Sales Charge 8.02% 7.71%
Assumes 4.5% Sales Charge 11/1/95 one year 6.08% 5.57%
Assumes No Sales Charge ended 10/31/96 11.05% 10.53%
Assumes 4.5% Sales Charge 11/1/91 five years 7.02% 6.73%
Assumes No Sales Charge ended 10/31/96 8.01% 7.69%
Class B Shares/5b/ 5/1/96 ended 10/31/96/5d/ 6.24% 6.01%
Institutional Shares 8/1/95/5e/ ended 10/31/96 12.95% 12.45%
11/1/95 one year
ended 10/31/96 11.55% 11.05%
Service Shares/5f/
MUNICIPAL INCOME FUND
Class A Shares 7/20/93/6a/ ended 10/31/96
Assumes 4.5% Sales Charge 3.80% 2.78%
Assumes No Sales Charge 5.27% 4.23%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.35% 0.65%
Assumes No Sales Charge 6.13% 5.40%
Class B Shares/6b/ 5/1/96 ended 10/31/96 4.40% 4.07%
</TABLE>
B-106
<PAGE>
VALUE OF $1,000 INVESTMENT
(TOTAL RETURN)
<TABLE>
<CAPTION>
Average Annual
---------------------------------------------------------
With Fee Without Fee
Reductions Reductions
and/or and/or
Investment Investment Expense Expense
Fund Date Period Limitations Limitations
- -------------------------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
GOVERNMENT INCOME FUND
Class A Shares 2/10/93/7a/ ended 10/31/96
Assumes 4.5% Sales Charge 5.41% 2.92%
Assumes No Sales Charge 6.72% 4.21%
11/1/95 ended 10/31/96
Assumes 4.5% Sales Charge 1.06% -0.33%
Assumes No Sales Charge 5.80% 4.35%
Class B Shares/7b/ 5/1/96 ended 10/31/96 4.85% 4.17%
- ----------------
</TABLE>
1a Institutional Shares of Adjustable Rate Fund commenced operations on July
17, 1991.
1b Administration Shares of Adjustable Rate Fund commended operations on April
15, 1993.
1c No Service Shares of Adjustable Rate Fund were outstanding during the
periods indicated.
1d Class A shares of Adjustable Rate Fund commenced operations on May 12, 1995.
2a Institutional Shares of Short Duration Government Fund commenced operations
on August 15, 1988.
2b Administration Shares of Short Duration Government Fund commenced operations
on February 28, 1996. Service Shares of Short Duration Government Fund
commenced operations on April 10, 1996. An aggregate total return (not
annualized) is shown instead of an average annual total return since
Administration and Service Shares have not completed a full 12 months of
operation as of October 31, 1996.
3a Institutional Shares of Short Duration Tax-Free Fund commenced operations on
October 1, 1992.
3b Administration Shares of Short Duration Tax-Free Fund commenced operations
on May 20, 1993.
3c Service Shares of Short Duration Tax-Free Fund commenced operations on
September 20, 1994.
4a Institutional Shares of Core Fund commenced operations on January 5, 1994.
4b Administration Shares of Core Fund commenced operations on February 28,
1996. Service Shares of Core Fund commenced operations on March 13, 1996. An
aggregate total return (not annualized) is shown instead of an average
annual total return since Administration and Service Shares have not
completed a full 12 months of operation as of October 31, 1996.
5a Class A Shares of Global Income Fund commenced operations on August 2, 1991.
5b Class B Shares of Global Income Fund commenced operations on May 1, 1996.
5c On November 27, 1992, the maximum sales charge was changed from 3% to 4.5%
of the offering price. All performance figures in this table incorporate the
sales charge currently in effect.
5d An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
5e Institutional Shares of Global Income Fund commenced operations on August 1,
1995.
5f No Service Shares of Global Income Fund were outstanding during the periods
indicated.
6a Class A shares of Municipal Income Fund commenced operations on July 20,
1993.
6b Class B Shares of Municipal Income Fund commenced operations on May 1, 1996.
An aggregate total return (not annualized) is shown instead of an average
annual total return since Class B Shares have not completed a full 12 months
of operation as of October 31, 1996.
B-107
<PAGE>
7a Class A Shares of Government Income Fund commenced operations on February
10, 1993.
7b Class B Shares of Government Income Fund commenced operations on May 1,
1996. An aggregate total return (not annualized) is shown instead of an
average annual total return since Class B Shares have not completed a full
12 months of operation as of October 31, 1996.
The above table should not be considered a representation of future
performance.
B-108
<PAGE>
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
Each Fund may from time to time advertise comparative performance as
measured by various independent sources, including, but not limited to, Lipper
------
Analytical Services, Inc., Donaghues Money Fund Report, Barron's, The Wall
- ------------------------- --------------------------- -------- --------
Street Journal, Weisenberger Investment Companies Service, Business Week,
- -------------- ----------------------------------------- -------------
Changing Times, Financial World, Forbes, Fortune, Morningstar Mutual Funds The
- -------------- --------------- ------ ------- ------------------------ ---
New York Times, Personal Investor, Sylvia Porter's Personal Finance and Money.
- -------------- ----------------- -------------------------------- -----
In addition, Adjustable Rate, Government Income and Short Duration
Government Funds may from time to time advertise their performance relative to
certain indices and benchmark investments, including: (a) the Shearson Lehman
Government/Corporate (Total) Index, (b) Shearson Lehman Government Index, (c)
Merrill Lynch 1-3 Year Treasury Index, (d) Merrill Lynch 2-Year Treasury Curve
Index, (e) the Salomon Brothers Treasury Yield Curve Rate of Return Index, (f)
the Payden & Rygel 2-Year Treasury Note Index, (g) 1 through 3 year U.S.
Treasury Notes, (h) constant maturity U.S. Treasury yield indices, (i) the
Consumer Price Index, (j) the London Interbank Offered Rate, (k) other taxable
investments such as certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds, repurchase
agreements, commercial paper and (l) historical data concerning the performance
of adjustable and fixed-rate mortgage loans.
Short Duration Tax-Free and Municipal Income Funds may from time to time
advertise their performance relative to certain indices, any components of such
indices and benchmark investments, including but not limited to: (a) the Lipper
Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed Income
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
Lehman Brothers Municipal Bond Indices; (c) the Merrill Lynch Municipal Bond
Institutional Total Rate of Return Indices; (d) Bond Buyer Indices; (e)
IBC/Donoghue's Money Fund Averages/Institutional Only Tax Free; and constant
maturity U.S. Treasury yield indices.
Core, Global Income and High Yield Funds may each from time to time
advertise its performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income
B-109
<PAGE>
Analysis and Mutual Fund Indices (which measure total return and average current
yield for the mutual fund industry and rank mutual fund performance); (b) the
CDA Mutual Fund Report published by CDA Investment Technologies, Inc. (which
analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (f)
the Lehman Brothers Aggregate Bond Index or its component indices; (g) the
Standard & Poor's Bond Indices (which measure yield and price of corporate,
municipal and U.S. government bonds); (h) the J.P. Morgan Global Government Bond
Index; (i) other taxable investments including certificates of deposit (CDs),
money market deposit accounts (MMDAs), checking accounts, savings accounts,
money market mutual funds and repurchase agreements; (j) historical investment
data supplied by the research departments of Goldman Sachs, Lehman Brothers
Inc., First Boston Corporation, Morgan Stanley & Co. Incorporated, Salomon
Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Donaldson
Lufkin and Jenrette Securities Corporation; and (k) Donoghue's Money Fund
Report (which provides industry averages for 7-day annualized and compounded
yields of taxable, tax-free and U.S. government money funds).
The composition of the investments in the above-referenced indices and the
characteristics of a Fund's benchmark investments are not identical to, and in
some cases may be very different from, those of a Fund's portfolio. These
indices and averages are generally unmanaged and the items included in the
calculations of such indices and averages may not be identical to the formulas
used by the a Fund to calculate its performance figures.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund), as well as the views of
Goldman Sachs as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
regulated matters believed to be of relevance to a Fund.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. The performance of various types of securities (taxable money market funds,
U.S. Treasury securities, adjustable rate mortgage securities, government
securities, municipal bonds) over time. However, the characteristics of
these securities are not identical to, and may be very different from,
those of a Fund's portfolio;
B-110
<PAGE>
. Volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500, IBC/Donoghue's Money Fund Average/ All
Taxable Index) over varying periods of time.
. Credit Ratings of domestic government bonds in various countries
. Price volatility comparisons of types of securities over different periods
of time.
. Price and yield comparisons of a particular security over different periods
of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other material
which highlight or summarize the services provided in support of an asset
allocation program.
In addition, advertisements or shareholder communications may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund. Such advertisements or information may include symbols, headlines or
other material which highlight or summarize the information discussed in more
detail therein.
Performance data is based on historical results and is not intended to
indicate future performance. Total return, thirty-day yield, tax equivalent
yield and distribution rate will vary based on changes in market conditions,
portfolio expenses, portfolio investments and other factors. The value of a
Fund's shares will fluctuate and an investor's shares may be worth more or less
than their original cost upon redemption. The Trust may also, at its
discretion, from time to time make a list of a Fund's holdings available to
investors upon request.
OTHER INFORMATION
A Fund will redeem shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value of each Fund during any 90-
B-111
<PAGE>
day period for any one shareholder. Each Fund, however, reserves the right to
pay redemptions exceeding $250,000 or 1% of the net asset value of each
respective Fund at the time of redemption by a distribution in kind of
securities (instead of cash) from such Fund. The securities distributed in kind
would be readily marketable and would be valued for this purpose using the same
method employed in calculating each Fund's net asset value per share. See "Net
Asset Value." If a shareholder receives redemption proceeds in kind, the
shareholder should expect to incur transaction costs upon the disposition of the
securities received in the redemption.
The right of a shareholder to redeem shares and the date of payment by a
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for a Fund to dispose of securities owned by it or
fairly to determine the value of its net assets; or for such other period as the
SEC may by order permit for the protection of shareholders of a Fund.
The Prospectuses and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
and this Additional Statement pursuant to the rules and regulations of the SEC.
The Registration Statement including the exhibits filed therewith may be
examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectuses or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The audited financial statements and related report of Arthur Andersen
LLP, independent public accounts, for each Fund contained in each Fund's 1996
Annual Report are hereby incorporated by reference and attached hereto. A copy
of the annual reports may be obtained without charge by writing Goldman, Sachs &
Co., 4900 Sears Tower, Chicago, Illinois 60606 or by calling Goldman, Sachs &
Co., at the telephone number on the back cover of each Fund's Prospectus.
B-112
<PAGE>
OTHER INFORMATION REGARDING PURCHASES,
REDEMPTIONS,EXCHANGES AND DIVIDENDS
The following information supplements the information in the Prospectus
under the captions "How to Invest," "How to Sell Shares of the Funds" and
"Dividends." Please see the Prospectus for more complete information.
OTHER PURCHASE INFORMATION
==========================
If shares of a Fund are held in a "street name" account with an Authorized
Dealer, all recordkeeping, transaction processing and payments of distributions
relating to the beneficial owner's account will be performed by the Authorized
Dealer, and not by the Fund and its Transfer Agent. Since the Funds will have
no record of the beneficial owner's transactions, a beneficial owner should
contact the Authorized Dealer to purchase, redeem or exchange shares, to make
changes in or give instructions concerning the account or to obtain information
about the account. The transfer of shares in a "street name" account to an
account with another dealer or to an account directly with the Fund involves
special procedures and will require the beneficial owner to obtain historical
purchase information about the shares in the account from the Authorized Dealer.
Authorized Dealers and other financial intermediaries provide varying
arrangements for their clients to purchase and redeem Fund shares. Some may
establish higher minimum investment requirements and others may limit the
availability of certain privileges with respect to the purchase and redemption
of shares or the reinvestment of dividends. Firms may arrange with their
clients for other investment or administrative services and may independently
establish and charge additional amounts to their clients for such services,
which charges would reduce a client's return. If shares of a Fund are held in a
"street name" account or were purchased through an Authorized Dealer,
shareholders should contact the Authorized Dealer to purchase, redeem or
exchange shares, to make changes in or give information about the account.
The Adviser, Distributor and/or their affiliates may pay, out of their own
assets, compensation to Authorized Dealers and other persons for the sale and
distribution of Class A and Class B Shares of the Funds and/or for the servicing
of those shares. These payments ("Additional Payments") would be in addition to
the payments by the Funds described in the Funds' Prospectus and this Statement
of Additional Information for distribution and shareholder servicing and
processing, and would also be in addition to the sales commissions payable to
dealers as set forth in the Prospectus. These Additional Payments may take the
form of "due diligence" payments for an Authorized Dealer's examination of the
Funds and payments for providing extra employee training and
B-113
<PAGE>
information relating to the Funds; "listing" fees for the placement of the Funds
on a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Funds; "marketing
support" fees for providing assistance in promoting the sale of the Funds' Class
A and Class B Shares; and payments for the sale of Class A and Class B Shares
and/or the maintenance of Shares balances. In addition, the Adviser,
Distributor and/or their affiliates may make Additional Payments for
subaccounting, administrative and/or shareholder processing services that are in
addition to the shareholder servicing and processing fees paid by the Funds.
The Additional Payments made by the Adviser, Distributor and their affiliates
may be a fixed dollar amount, may be based on the number of customer accounts
maintained by an Authorized Dealer, or may be based on a percentage of the value
of Shares sold to, or held by, customers of the Authorized Dealers involved, and
may be different for different Authorized Dealers. Furthermore, the Adviser,
Distributor and/or their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, as well as sponsor various
educational programs, sales contests and/or promotions in which participants may
receive prizes such as travel awards, merchandise and cash and/or investment
research pertaining to particular securities and other financial instruments or
to the securities and financial markets generally, educational information and
related support materials and hardware and/or software. The Adviser,
Distributor and their affiliates may also pay for the travel expenses, meals,
lodging and entertainment of Authorized Dealers and their salespersons and
guests in connection with educational, sales and promotional programs, subject
to applicable NASD regulations. The Distributor currently expects that such
additional bonuses or incentives will not exceed 0.50% of the amount of any
sales.
RIGHT OF ACCUMULATION - (CLASS A)
=================================
A Class A shareholder qualifies for cumulative quantity discounts if the
current purchase price of the new investment plus the shareholder's current
holdings of existing Class A Shares (acquired by purchase or exchange) of the
Funds and Class A Shares of any other Goldman Sachs Fund (as defined in the
Prospectus) total the requisite amount for receiving a discount. For example,
if a shareholder owns shares with a current market value of $65,000 and
purchases additional Class A Shares of the Government Income Fund with a
purchase price of $45,000, the sales charge for the $45,000 purchase would be
3.0% (the rate applicable to a single purchase of more than $100,000). Class A
Shares purchased without the imposition of a sales charge and shares of another
class of the Funds may not be aggregated with Class A Shares purchased subject
to a sales charge. Class A Shares of the Funds and any other Goldman Sachs Fund
purchased (i) by an individual, his spouse and his minor children, and (ii) by a
trustee, guardian or other fiduciary of a single trust estate or a single
fiduciary account,
B-114
<PAGE>
will be combined for the purpose of determining whether a purchase will qualify
for such right of accumulation and, if qualifying, the applicable sales charge
level. For purposes of applying the right of accumulation, shares of the Funds
and any other Goldman Sachs Fund purchased by an existing client of the Private
Client Services Division of Goldman Sachs will be combined with Class A Shares
held by any other account over which such client or the client's spouse
exercises investment or voting power. In addition, Class A Shares of the Funds
and Class A Shares of any other Goldman Sachs Fund purchased by partners,
directors, officers or employees of the same business organization or by groups
of individuals represented by and investing on the recommendation of the same
accounting firm, certain affinity groups or other similar organization
(collectively, "eligible persons") may be combined for the purpose of
determining whether a purchase will qualify for the right of accumulation and,
if qualifying, the applicable sales charge level. This right of accumulation is
subject to the following conditions: (i) the business organization's, group's
or firm's agreement to cooperate in the offering of the Funds' shares to
eligible persons; and (ii) notification to the Funds at the time of purchase
that the investor is eligible for this right of accumulation.
STATEMENT OF INTENTION - (CLASS A)
==================================
If a shareholder anticipates purchasing at least $100,000 ($500,000 in the
case of Adjustable Rate Government Fund and $250,000 in the case of Short
Duration Government and Short Duration Tax-Free Funds) of Class A Shares of a
Fund alone or in combination with Class A Shares of any other Goldman Sachs Fund
within a 13-month period, the shareholder may purchase shares of the Fund at a
reduced sales charge by submitting a Statement of Intention (the "Statement").
Shares purchased pursuant to a Statement will be eligible for the same sales
charge discount that would have been available if all of the purchases had been
made at the same time. The shareholder or his Authorized Dealer must inform
Goldman Sachs that the Statement is in effect each time shares are purchased.
There is no obligation to purchase the full amount of shares indicated in the
Statement. A shareholder may include the value of all Class A Shares on which a
sales charge has previously been paid as an "accumulation credit" toward the
completion of the Statement, but a price readjustment will be made only on Class
A Shares purchased within ninety (90) days before submitting the Statement. The
Statement authorizes the Transfer Agent to hold in escrow a sufficient number of
shares which can be redeemed to make up any difference in the sales charge on
the amount actually invested. For purposes of satisfying the amount specified
on the Statement, the gross amount of each investment, exclusive of any
appreciation on shares previously purchased, will be taken into account.
CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
=================================================
B-115
<PAGE>
A Fund shareholder should obtain and read the prospectus relating to any
other Goldman Sachs Fund or ILA Portfolio (as defined in the Prospectus) and its
shares or units and consider its investment objective, policies and applicable
fees before electing cross-reinvestment into that Fund or Portfolio. The
election to cross-reinvest dividends and capital gain distributions will not
affect the tax treatment of such dividends and distributions, which will be
treated as received by the shareholder and then used to purchase shares of the
acquired fund. Such reinvestment of dividends and distributions in shares of
other Goldman Sachs Funds or in units of ILA Portfolios is available only in
states where such reinvestment may legally be made.
AUTOMATIC EXCHANGE PROGRAM
==========================
A Fund shareholder may elect cross-reinvestment into an identical account
or an account registered in a different name or with a different address, social
security or other taxpayer identification number, provided that the account in
the acquired fund has been established, appropriate signatures have been
obtained and the minimum initial investment requirement has been satisfied. A
Fund shareholder should obtain and read the prospectus relating to any other
Goldman Sachs Fund and its shares and consider its investment objective,
policies and applicable fees and expenses before electing an automatic exchange
into that Goldman Sachs Fund.
SYSTEMATIC WITHDRAWAL PLAN
==========================
A systematic withdrawal plan (the "Systematic Withdrawal Plan") is
available to shareholders of a Fund whose shares are worth at least $5,000. The
Systematic Withdrawal Plan provides for monthly payments to the participating
shareholder of any amount not less than $50.
Dividends and capital gain distributions on shares held under the
Systematic Withdrawal Plan are reinvested in additional full and fractional
shares of the applicable Fund at net asset value. The Transfer Agent acts as
agent for the shareholder in redeeming sufficient full and fractional shares to
provide the amount of the systematic withdrawal payment. The Systematic
Withdrawal Plan may be terminated at any time. Goldman Sachs reserves the right
to initiate a fee of up to $5 per withdrawal, upon thirty (30) days written
notice to the shareholder. Withdrawal payments should not be considered to be
dividends, yield or income. If periodic withdrawals continuously exceed new
purchases and reinvested dividends and capital gains distributions, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. The maintenance of a withdrawal plan concurrently with purchases of
additional Class A 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
B-116
<PAGE>
A and Class B shares. The CDSC applicable to Class B shares redeemed under a
systematic withdrawal plan may be waived. See "How to Invest--Waiver or
Reduction of Contingent Deferred Sales Charge" in the Prospectus. In addition,
each withdrawal constitutes a redemption of shares, and any gain or loss
realized must be reported for federal and state income tax purposes. A
shareholder should consult his or her own tax adviser with regard to the tax
consequences of participating in the Systematic Withdrawal Plan. For further
information or to request a Systematic Withdrawal Plan, please write or call the
Transfer Agent.
OFFERING PRICE OF CLASS A SHARES
================================
Class A Shares of Government Fund, Municipal Fund, Core Fund and Global
Income Fund are sold at a maximum sales charge of 4.5%, Adjustable Rate Fund at
1.5% and Short Duration Government Fund and Short Duration Tax-Free Fund at 3%.
Using the offering price as of October 31, 1996, the maximum offering price of
the class A shares of each Fund's shares then in existence would be as follows:
<TABLE>
<CAPTION>
Offering
Net Asset Maximum Price
Value Sales Charge to Public
--------- ------------ ---------
<S> <C> <C> <C>
Adjustable Rate Fund $ 9.82 $0.15 $ 9.97
Municipal Income Fund $14.37 $0.68 $15.05
Government Income Fund $14.36 $0.68 $15.04
Global Income Fund $14.53 $0.68 $15.21
Short Duration Government N/A N/A N/A
Short Duration Tax-Free N/A N/A N/A
Core Fixed Income N/A N/A N/A
</TABLE>
DISTRIBUTION AND AUTHORIZED DEALER SERVICE PLANS
CLASS A DISTRIBUTION PLANS. As described in the Prospectus, the Trust
with respect to the Class A Shares of each Fund has adopted a distribution plan
(the "Class A Plans") pursuant to Rule 12b-1 under the Act. See "Distribution
and Authorized Dealer Service Plans" in the Prospectus.
The Class A Plans were most recently approved on April 23, 1997 by a
majority vote of the Trustees of the Trust, including a majority of the non-
interested Trustees of the Trust who have no direct or indirect financial
interest in the Class A Plans, cast in
<PAGE>
person at a meeting called for the purpose of approving the Plans. The Plans
were approved by the sole initial shareholder of Class A Shares of Adjustable
Rate Fund on May 12, 1995, Municipal Income Fund on July 16, 1993, Government
Income Fund on January 29, 1993, and Global Income Fund on December 5,
1991.
The compensation payable under the Class A Plans may not exceed 0.25%
per annum of each Fund's average daily net assets attributable to its Class A
Shares. Currently, Goldman Sachs is waiving its entire fee under the Class A
Plans applicable to each Fund other than Global Income Fund and is limiting the
fee payable by Global Income Fund to 0.21% of average daily net assets
attributable to Class A Shares. Goldman Sachs has no current intention of
modifying or discontinuing such waivers and limitation, but may do so in the
future at its discretion.
Effective June 30, 1995, the Class A Plan for Adjustable Rate
Government, Government Income, Municipal and Global Income Funds was amended to
reduce the fee payable under the Plan from 0.50% to 0.25% of a Fund's average
daily net assets attributable to Class A Shares. At the same time, each Fund
adopted an Authorized Dealer Service Plan. See "Authorized Dealer Service
Plans." For the fiscal years ended October 31, 1996, 1995 and 1994, each Fund
paid Goldman Sachs the following amounts under the Class A Plans:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ---------- ----------
<S> <C> <C> <C>
Adjustable Rate
Government Fund
with fee waivers $ 0 $ 0 $ N/A
without fee waivers 30,905 17,967 N/A
Municipal Income Fund
with fee waivers 0 70,023 85,242
without fee waivers 131,925 195,152 217,701
Government Income Fund
with fee waivers 0 25,630 14,350
without fee waivers 73,949 76,499 65,604
Global Income Fund
with fee waivers 493,170 645,259 1,518,814
without fee waivers 549,164 1,257,211 3,037,628
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses incurred
in accordance with the Plans of distributing a Fund's shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
<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 a Plan were terminated by the Trustees of the Trust and no successor plan
were adopted, the Fund would cease to make payments under the Plan to Goldman
Sachs and Goldman Sachs would be unable to recover the amount of any of its
unreimbursed expenditures. However, Goldman Sachs does not intend to make
expenditures for which it may be compensated under a Plan at a rate that
materially exceeds the rate of compensation received under the Plan.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following distribution expenses under the Class A Plan on behalf of Adjustable
Rate Government, Government Income, Municipal Income and Global Income Funds
(Goldman Sachs used the fees, if any, received under the Plan in the same
proportion to the amounts set forth below).
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, 1996 of the Telephone Prospectuses Sales Literature
Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
Adjustable
Rate Fund/1/ N/A N/A N/A N/A N/A
Municipal
Income Fund/2/ N/A N/A N/A N/A N/A
Government
Income Fund/2/ N/A N/A N/A N/A N/A
Global
Income Fund 0 $274,757 $116,417 $36,868 $102,215
</TABLE>
_________________________
/1/ No expenses are reflected for Class A shares of Adjustable Rate Fund.
Since inception of this class, Goldman Sachs has waived the 0.25% Class A Plan
fee; no revenue has therefore been earned for the period.
/2/ Commencing June 1, 1995, Goldman Sachs is waiving the 0.25% Class A Plan
fee; as no distribution revenue has therefore been earned after June 1, 1995, no
expenses are reflected above.
Under the Class A Plans, Goldman Sachs, as distributor of each Fund's Class
A Shares, will provide to the Trustees of the Trust for their review, and the
Trustees of the Trust will review at least quarterly a written report of the
services provided and
B-119
<PAGE>
amounts expended by Goldman Sachs under the Plans and the purposes for which
such services were performed and expenditures were made.
The Class A Plans will remain in effect until May 1, 1998 and from year to
year thereafter, provided such continuance is approved annually by a majority
vote of the Trustees of the Trust, including a majority of the non-interested
Trustees of the Trust who have no direct or indirect financial interest in the
Class A Plans. A Class A Plan may not be amended to increase materially the
amount to be spent for the services described therein without approval of a
majority of the outstanding Class A Shares of the applicable Fund. All material
amendments of the Class A Plan must also be approved by the Trustees of the
Trust in the manner described above. A Class A Plan may be terminated at any
time without payment of any penalty by a vote of a majority of the non-
interested Trustees of the Trust or by vote of a majority of the Class A Shares
of the applicable Fund. So long as a Class A Plan is in effect, the selection
and nomination of non-interested Trustees of the Trust shall be committed to the
discretion of the non-interested Trustees of the Trust. The Trustees of the
Trust have determined that in their judgment there is a reasonable likelihood
that the Plans will benefit the Funds and their Class A Shareholders.
AUTHORIZED DEALER SERVICE PLAN. As described in the Prospectus, the Trust
with respect to each Fund has adopted non-Rule 12b-1 Authorized Dealer Service
Plans (the "Service Plans") with respect to Class A Shares and Class B Shares.
See "Distribution and Authorized Dealer Service Plans" in the Prospectus.
The compensation under the Service Plans may not exceed 0.25% per annum of
the average daily net assets attributable to the class of shares to which the
plan relates. Up to the entire amount of the fee under the Service Plans may be
paid to Authorized Dealers for providing personal and account maintenance
services in connection with each Fund's Shares. Under the Service Plans,
Goldman Sachs will provide to the Trustees for their review at least quarterly a
written report of the services provided and amount expended under the Service
Plans.
For the fiscal years ended October 31, 1996 and October 31, 1995 the
Adjustable Rate Government, Government Income, Municipal Income and Global
Income Funds paid Goldman Sachs the following amounts under their respective
Service Plans with respect to its Class A Shares and Class B shares:
B-120
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
1996 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Adjustable Rate Fund $ 30,905 17,967 $ N/A
Municipal Income Fund 131,925 55,106 126
Government Income Fund 74,060 25,239 111
Global Income Fund 549,164 281,949 125
</TABLE>
The Service Plans applicable to Class A Shares and Class B Shares were most
recently approved on April 23, 1997 by a majority of the Board of Trustees of
the Trust. The Service Plans will remain in effect until May 1, 1998 and from
year to year thereafter, provided that such continuance is approved annually by
a majority vote of the Trustees, including a majority of the non-interested
Trustees who have no direct or indirect financial interest in the Service Plans.
CLASS B DISTRIBUTION PLAN. As described in the Prospectus, the Trust has
adopted on behalf of Short Duration Government Fund, Short Duration Tax Free
Fund, Municipal Income Fund, Government Income Fund, Core Fixed Income Fund,
Global Income Fund and High Yield Fund, distribution plans (the "Class B Plans")
pursuant to Rule 12b-1 under the Act with respect to Class B Shares. See
"Distribution and Authorized Dealer Service Plans" in the Prospectus.
The Class B Plans were most recently approved on April 23, 1997 on behalf
of Municipal Income, Government Income, Global Income, High Yield, Short
Duration Government, Short Duration Tax-Free and Core Fixed Income Funds, in
each case by a majority vote of the Trust's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the Class B Plans (the "non-interested
Trustees"), cast in person at a meeting called for the purpose of approving the
Class B Plans.
With respect to each Fund, the compensation payable under the Class B Plans
is equal to 0.75% per annum of the average daily net assets attributable to
Class B Shares of that Fund. The fees received by Goldman Sachs under the Class
B Plans and contingent deferred sales charge on Class B Shares may be sold by
Goldman Sachs as distributor to entities which provide financing for payments to
Authorized Dealers in respect of sales of Class B Shares. To the extent such
fee is not paid to such dealers, Goldman Sachs may retain such fee as
compensation for its services and expenses of distributing the Funds' Class B
Shares. If such fee exceeds its expenses, Goldman Sachs may realize a profit
from these arrangements.
For the fiscal years ended October 31, 1996, each Fund paid Goldman Sachs
the following amounts under the Class B Plans:
B-121
<PAGE>
<TABLE>
<CAPTION>
1996
----
<S> <C>
Municipal Income Fund
with fee waivers 378
without fee waivers 378
Government Income Fund
with fee waivers 332
without fee waivers 332
Global Income Fund
with fee waivers 374
without fee waivers 374
</TABLE>
Goldman Sachs may pay up to the entire amount of such fee under the Plans
to Authorized Dealers for providing services in connection with the sale of each
Fund's shares. To the extent such fee is not paid to such dealers, Goldman
Sachs may retain such fee as compensation for its services and expenses incurred
in accordance with the Plans of distributing a Fund's shares. If such fee
exceeds its expenses, Goldman Sachs may realize a profit from these
arrangements.
The Class B Plans are compensation plans which provide for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plans were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Funds would cease to
make distribution payments to Goldman Sachs and Goldman Sachs would be unable to
recover the amount of any of its unreimbursed distribution expenditures.
During the fiscal year ended October 31, 1996, Goldman Sachs incurred the
following expenses in connection with distribution under the Class B Plan on
behalf of each Fund (Goldman Sachs used the fees, if any, received under the
Plan in the same proportion to the amounts set forth below).
<TABLE>
<CAPTION>
Fiscal Year Compensation Compensation Allocable Printing and Preparation and
ended to Dealers and Expenses Overhead, Mailing of Distribution of
October 31, of the Telephone Prospectuses Sales Literature
1996 Distributor and Travel to Other than and Advertising
and its Sales Expenses Current
Personnel Shareholders
<S> <C> <C> <C> <C> <C>
Municipal
Income Fund $241/(1)/ N/A N/A N/A N/A
Government
Income Fund $299/(1)/ N/A N/A N/A N/A
Global
Income Fund $247/(1)/ N/A N/A N/A N/A
</TABLE>
B-122
<PAGE>
- -----------------------
(1) Advance commissions paid to dealers of 4% on Class B sales are
considered deferred assets which are amortized over a period of 6
years; amounts presented above reflect amortization expense recorded
during the period presented.
Under the Class B Plans, Goldman Sachs, as distributor of the Funds'
shares, will provide to the Board of Trustees for its review, and the Board will
review at least quarterly, a written report of the services provided and amounts
expended by Goldman Sachs under the Class B Plans and the purposes for which
such services were performed and expenditures were made.
The Class B Plans will remain in effect with respect to the Funds from year
to year, provided such continuance is approved annually by a majority vote of
the Board of Trustees, including a majority of the non-interested Trustees. A
Class B Plan may not be amended to increase materially the amount to be spent
for the services described therein as to any Fund without approval of a majority
of the outstanding Class B Shares of that Fund. All material amendments of the
Class B Plan must also be approved by the Board of Trustees of the Trust in the
manner described above. With respect to any Fund, a Class B Plan may be
terminated at any time without payment of any penalty by a vote of the majority
of the non-interested Trustees or by vote of a majority of the outstanding
voting securities of the Class B Shares of that Fund. So long as a Class B Plan
is in effect, the selection and nomination of non-interested Trustees shall be
committed to the discretion of the non-interested Trustees. The Trustees have
determined that in their judgment there is a reasonable likelihood that the
Class B Plans will benefit each Fund and their respective Class B shareholders.
B-123
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with
a robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and
Treasury prices remained in a narrow trading range throughout the summer and
fall. During September and October, however, interest rates retreated and the
bond market strengthened. The rebound was primarily due to evidence of a
slowing U.S. economy and strong demand for Treasury bonds from the central banks
of China, Japan and Germany, which accelerated their purchases dramatically
toward the end of the period. By the end of October, prices of 30-year
Treasuries broke out of the trading range that had persisted for over six
months.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 GS Core Fixed Income Fund 22
GS Adjustable Rate Government Fund 3 Financial Statements 30
GS Short Duration Government Fund 9 Notes to Financial Statements 34
GS Short Duration Tax-Free Fund 15 Financial Highlights 42
- ---------------------------------------------------------------------------------------------------------
</TABLE>
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter,
with annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Tresuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[GRAPH APPEARS HERE]
The yield curve steepened on the short end and shifted upward on the longer end.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significiantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a
Republican-controlled Congress, which points toward continued budgetary
restraint.
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and
we look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head,
Goldman Sachs Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head,
Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
2
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Adjustable Rate Government Fund seeks a high level of current income
consistent with low volatility of principal. The portfolio ordinarily invests
substantially all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with primary emphasis on
adjustable rate mortgage securities (ARMs). Under normal interest rate
conditions, the fund's duration is expected to be in a range approximately equal
to that of a six-month to one-year U.S. Treasury security.
The ARM Market Began Weak but Improved as Prepayments Slowed and Demand
Increased
The key factors affecting ARM performance during the 12 months under review
were the changing direction of interest rates and, consequently, the pace of
mortgage prepayments. From November 1995 through early February 1996, declining
interest rates spurred homeowners to switch from ARMs to fixed rate mortgages to
lock in attractive rates. The high level of refinancing activity depressed the
ARM market and caused yield spreads between ARMs and Treasuries to widen until
the end of January 1996, when long-term interest rates began to rise. Throughout
the spring, the ARM market strengthened as interest rates climbed sharply.
Spreads between ARMs and Treasuries continued to tighten even after rates
stabilized from the end of May through August, partly due to strong demand from
"crossover" investors from other short-duration fixed income sectors. Although
interest rates declined in September and October, mortgage prepayment fears
remained subdued as rates were still relatively high compared with their levels
a year earlier. Investor demand for seasoned one-year Constant Maturity Treasury
(CMT) ARMs, which our fund stresses, remained especially strong due to their
relative prepayment stability in a falling rate environment.
Performance Review
During the period under review, the fund's Institutional, Administration
and Class A shares all significantly outperformed both the six-month U.S.
Treasury bill and the one-year U.S. Treasury bill. (As of October 31, the fund's
duration was 0.7 years, in between that of the six-month and the one-year U.S.
Treasury bill.) The fund's positive performance can be attributed to the
incremental yield its ARM holdings delivered over similar-duration Treasuries
and tightening spreads between ARMs and Treasuries.
- ------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six-
Month One-Year
Institu- Adminis- Class Treasury Treasury
tional tration A Bill Bill
------ ------- - ---- ----
<S> <C> <C> <C> <C> <C>
Total Return (based 6.86% 6.60% 6.60% 5.48% 5.82%
on net asset value)
- ------------------------------------------------------------------------
Return From 6.25% 5.99% 5.99% NA NA
Monthly
Distributions
- ------------------------------------------------------------------------
Return From Price 0.61% 0.61% 0.61% NA NA
Appreciation
- ------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.83 $9.83 NA NA
- ------------------------------------------------------------------------
NAV Change +$0.06 +$0.06 +$0.06 NA NA
- ------------------------------------------------------------------------
</TABLE>
We are also pleased to note that the fund outperformed most of its peers.
For the 12 months ended October 31, 1996, the fund's Institutional shares ranked
fourth out of 53 adjustable rate mortgage funds based on total return, as
tracked by Lipper Analytical Services, Inc. (Lipper does not rank the fund's
Administration and Class A shares. Please note that Lipper rankings do not take
sales charges into account and that past performance is not a guarantee of
future results.) As of October 31, 1996, the
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
fund's Institutional shares were ranked "four stars" by Morningstar, Inc., an
independent rating agency.\1\
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Repos/Cash Equivalents 3.4%
CMOs 3.5%
SBA Floaters 7.8%
ARMs 85.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ---------------------------------------------
/1/ Source (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five- and ten-year average annual returns (where applicable) in excess of 90-day
Treasury bill returns with appropriate fee and sales charge adjustments and a
risk factor that reflects fund performance below 90-day Treasury bill returns.
The one-year rating is calculated using the same methodology, but is not a
component of the overall rating. The fund's Institutional shares received five
and four stars for the three- and five-year periods, respectively. The
Institutional shares were rated among 1,054 and 572 fixed income funds for the
three- and five-year periods, respectively. For the one-year period, the
Institutional shares were rated among 1,654 fixed income funds. 22.5% of the
funds receive the four-star rating. The Morningstar rating applies only to the
fund's Institutional shares; the fund's Class A and Administration shares have
not been rated. Class A and Administration shares are subject to additional fees
that may have the effect of lowering performance and may affect and future
Morningstar rating. Morningstar rates funds against their peers in the same
category. In all, there are five Morningstar categories (domestic equity,
international equity, fixed income, municipal and hybrid). Morningstar ratings
range from five stars (highest) to one star (lowest). Funds with five-star
ratings are in the top 10% of their category, four-star ratings in the next
22.5%, three stars the next 35%, two stars the next 22.5% and one star the
lowest 10% of their categories.
Portfolio Composition and Investment Strategies
During the period under review, the portfolio's sector allocation shifted
slightly, with reductions in collateralized mortgage obligations (CMOs) and
Small Business Administration (SBA) loans in favor of ARMs.
. ARMs. As of October 31, 1996, ARMs accounted for 85.3% of the portfolio, up
from 80.2% a year ago. We emphasized seasoned, one-year CMT issues that offered
relative prepayment and duration stability as well as incremental yield over
Treasuries. The position significantly contributed to the fund's performance
during the period.
. SBA Floaters. The portfolio held a 7.8% allocation in securities backed by
Small Business Administration loans, which traded at attractive spreads relative
to Treasuries. We trimmed the portfolio's holdings in the sector slightly from
8.9% a year ago to take profits after the position performed well.
. CMOs. CMOs accounted for 3.5% of the portfolio as of October 31,
approximately half their weighting a year ago (7.7%). This position provided
relatively stable cash flows and a greater number of opportunities to take
advantage of potential mispricing than comparable fixed income sectors. During
December 1995 and January 1996, the sector became expensive versus
similar-duration Treasuries, and we subsequently sold part of the fund's
holdings at a profit. The fund's CMO position included 1.4% in floaters, which
added incremental yield, and 0.4% in sequential-pay CMOs. In addition, the fund
held CMO super floaters, discussed below.
. Prudent Use of Derivatives. We used higher risk derivatives very sparingly to
enhance the fund's performance without taking on additional undue risk. As of
October 31, 1996, the fund held a 1.5% position in super floaters, which
contributed to its performance during the year. (Super floaters are floating
rate securities whose coupons reset higher and more quickly than regular
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Agency Fund (continued)
- --------------------------------------------------------------------------------
ARMs in a rising interest rate environment.) The portfolio also included minor
positions in interest-only (IO) and inverse IO securities.
. Duration. As of October 31, the duration of the fund was 0.7 years, unchanged
from a year earlier. Rather than attempting to make interest rate predictions,
we seek to provide excess returns over a similar-duration U.S. Treasury security
through sector weightings and security selection. During the period, we used
financial futures as a tool to help manage the portfolio's duration.
. Credit Quality. The fund invests exclusively in securities issued by the U.S.
government and its agencies or instrumentalities, which are considered to be of
the highest credit quality.
ARM Outlook: Seasoned ARMs Are Expected to Perform Well Relative to Other
Sectors
Our outlook for the ARM sector is moderately constructive. Although spreads
have tightened over the course of the year, we expect them to remain stable for
the near term due to strong investor demand and limited supply. In addition, we
believe that our core holding of seasoned ARMs should fare well relative to less
seasoned issues if rates continue to decline and prepayments increase.
Distribution Policy
During the 12-month period ended October 31, 1996, the fund's Institutional,
Administration and Class A shares distributed $0.59, $0.57 and $0.57 per
share, respectively.
The fund distributes substantially all of its investment company taxable
income. The dividend is set at the start of each month, based on the income the
fund is expected to generate. However, because the fund invests primarily in
mortgage securities that are subject to prepayments, we cannot precisely predict
the amount of principal and interest that a portfolio will receive. Therefore,
at times a portfolio may distribute amounts above or below current income
levels. To date, however, our dividend policy has not affected the management of
the fund nor significantly affected its net asset value (NAV) per share.
In conclusion, we appreciate your investment in the GS Adjustable Rate
Government Fund and will continue to seek attractive fixed income investments in
the months ahead.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Peter D. Dion
Peter D. Dion
/s/ James P. McCarthy
James P. McCarthy
Portfolio Managers
GS Adjustable Rate Government Fund
November 29, 1996
- --------------------------------------------------------------------------------
5
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Adjustable Rate Government Fund based on a normal minimum
initial investment, for each class, is compared to its benchmarks--the Lehman
Brothers Mutual Fund Short (1-2) U.S. Government Index ("Lehman 1-2 Index") and
the six month and one year U.S. Treasury Bills ("6-Month T-Bill / 1-Year T-
Bill"). All performance data shown represents past performance and should not be
considered indicative of future performance which will fluctuate as market
conditions change. The investment return and principal value of an investment
will fluctuate with changes in market conditions so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
HYPOTHETICAL INVESTMENTS/(a)/
Institutional Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8/1/91 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/91 51,047 51,581 51,179 50,870
- --------------------------------------------------------------------------------
10/31/92 54,176 55,506 54,161 53,376
- --------------------------------------------------------------------------------
10/31/93 56,414 58,368 56,198 55,197
- --------------------------------------------------------------------------------
10/31/94 57,475 59,511 57,744 57,257
- --------------------------------------------------------------------------------
10/31/95 61,355 64,343 61,766 60,819
- --------------------------------------------------------------------------------
10/31/96 65,576 68,197 65,373 64,158
- --------------------------------------------------------------------------------
</TABLE>
Administration Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Administration Lehman Short (1-2) One Year Six Month
Shares Gov't Index T-Bill T-Bill
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/93 50,000 50,000 50,000 50,000
- --------------------------------------------------------------------------------
10/31/93 50,917 50,931 50,785 50,780
- --------------------------------------------------------------------------------
10/31/94 51,747 51,931 52,182 52,675
- --------------------------------------------------------------------------------
10/31/95 55,100 56,148 55,835 55,951
- --------------------------------------------------------------------------------
10/31/96 58,742 59,511 59,096 59,023
- --------------------------------------------------------------------------------
</TABLE>
Class A Shares
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Short (1-2) One Year Six Month
(no sales charge) (w/ sales charge) Gov't Index T-Bill T-Bill
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/1/95 10,000 9,850 10,000 10,000 10,000
- ---------------------------------------------------------------------------------------------------
10/31/95 10,222 10,069 10,277 10,260 10,246
- ---------------------------------------------------------------------------------------------------
10/31/96 10,898 10,735 10,893 10,859 10,809
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------
Average Annual Total Return
--------------------------------------------------
One Year Five Year Since Inception/(b)/
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Institutional Shares 6.86% 5.13% 5.32%
- --------------------------------------------------------------------------------
Administration Shares 6.60% N/A 4.69%
- --------------------------------------------------------------------------------
Class A Shares
excluding sales charge 6.60% N/A 6.40%
- --------------------------------------------------------------------------------
Class A Shares
including sales charge 4.99% N/A 5.29%
- --------------------------------------------------------------------------------
</TABLE>
/(a)/ For comparative purposes, initial investments are assumed to be made on
the first day of the month following the commencement of operations.
/(b)/ The Institutional, Administration and Class A shares commenced operations
July 17, 1991, April 15, 1993 and May 15, 1995, respectively.
- --------------------------------------------------------------------------------
6
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations--96.3%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(d)--25.6%
<S> <C> <C> <C>
$ 409,475 7.33% 11/01/17 $ 422,849
1,443,341 7.54 12/01/18 1,482,297
2,695,805 7.40 07/01/18 2,793,527
1,799,007 7.69 01/01/19 1,857,314
10,670,041 7.38 05/01/19 11,021,833
20,341,589 7.58 11/01/19 21,218,921
5,280,731 7.70 05/01/20 5,464,395
19,004,192 7.42 06/01/20 19,698,985
37,238,927 7.73 02/01/22/(a)/ 38,845,042
4,072,603 7.39 08/01/22 4,215,145
2,234,941 7.56 08/01/22 2,331,334
6,804,200 7.53 09/01/22 7,067,182
17,808,242 7.61 11/01/22 18,565,092
10,195,026 7.63 06/01/24 10,506,892
3,045,972 7.31 12/01/24 3,122,121
3,495,056 7.20 02/01/28 3,604,835
4,584,605 7.09 07/01/29 4,671,987
1,815,464 7.62 07/01/30 1,892,059
2,055,859 7.39 05/01/31 2,110,462
- --------------------------------------------------------------------------------
$160,892,272
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)--55.4%
$ 1,138,394 7.80% 11/01/14 $ 1,187,493
6,190,161 6.54 03/01/17 6,277,194
3,662,002 7.56 03/01/17 3,799,511
4,221,326 6.21 03/01/18 4,247,709
6,778,125 7.66 04/01/18 7,046,064
874,932 7.63 05/01/18 901,180
7,405,181 7.34 07/01/18 7,724,566
5,249,737 7.41 07/01/18 5,456,472
6,398,858 7.08 08/01/18 6,609,828
3,972,504 7.64 08/01/18 4,143,838
3,746,795 7.42 10/01/18 3,896,068
6,780,326 7.41 11/01/18 7,009,162
2,068,449 7.29 12/01/18 2,138,591
13,495,001 7.67 12/01/18/(a)/ 14,077,040
3,484,080 7.27 06/01/19 3,597,870
4,440,531 7.31 07/01/19 4,579,297
1,698,502 7.34 07/01/19 1,755,826
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Adjustable Rate Federal National Mortgage Association
(FNMA)(d)(continued)
<S> <C> <C> <C>
$ 2,849,462 7.46% 01/01/20 $ 2,942,526
3,037,915 7.70 03/01/20 3,168,940
8,771,533 7.40 07/01/20 9,055,204
4,563,057 7.48 09/01/20 4,746,994
4,953,382 7.53 02/01/21 5,167,022
5,289,644 7.28 04/01/21 5,464,044
74,489,219 7.51 09/01/21/(a)/ 77,678,102
4,088,820 7.95 11/01/21 4,210,095
22,090,964 7.56 02/01/22 23,043,747
14,611,569 7.68 06/01/22 15,112,892
6,682,461 7.47 08/01/22 6,893,894
759,290 7.48 08/01/22 776,511
38,116,807 7.56 09/01/22/(a)/ 39,760,785
1,934,079 7.53 02/01/23 1,968,235
277,701 6.22 12/01/23 276,574
18,079,861 7.48 09/01/25 18,856,752
2,565,500 7.33 10/01/27 2,653,702
1,177,401 7.04 07/01/29 1,205,729
3,288,252 7.59 04/01/30 3,376,640
8,565,310 7.58 01/01/31 8,934,732
28,276,177 6.09 02/01/31 28,161,376
- --------------------------------------------------------------------------------
$ 347,902,205
- --------------------------------------------------------------------------------
Adjustable Rate Government National Mortgage Association
(GNMA)(d) -- 2.2%
$ 1,527,707 6.50% 03/20/16 $ 1,551,096
1,806,135 7.12 08/20/17 1,839,711
1,026,294 7.12 08/20/18 1,046,984
8,886,125 6.00 11/20/25 9,040,211
- --------------------------------------------------------------------------------
$ 13,478,002
- --------------------------------------------------------------------------------
Adjustable Rate Small Business Administration (SBA)(d)--7.8%
$ 1,416,469 6.75% 10/25/14 $ 1,449,883
2,562,866 6.75 02/25/15 2,624,144
3,684,715 6.75 03/25/15 3,773,370
2,839,268 6.75 04/25/15 2,907,581
2,057,142 6.75 05/25/15 2,106,637
1,036,764 6.75 08/25/15 1,062,040
1,684,161 6.75 09/25/15 1,725,220
2,069,161 6.75 10/25/15 2,119,917
1,110,382 6.37 09/25/16 1,125,305
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations (continued)
Adjustable Rate Small Business Administration
(SBA)(d)(continued)
$ 4,125,881 6.37% 07/25/17 $ 4,181,333
9,019,837 6.37 08/25/17 9,141,062
4,040,857 6.37 09/25/17 4,095,166
3,577,478 6.37 10/25/17 3,625,559
8,937,943 6.37 02/25/18 9,058,069
- --------------------------------------------------------------------------------
$ 48,995,286
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations-5.3%
Adjustable Rate CMOs(d)-1.8%
FNMA Remic Trust 1990-145, Class A
$ 11,024,778 6.51% 12/25/20 $ 11,025,439
- --------------------------------------------------------------------------------
Inverse Floater(d)-0.0%
FNMA Remic Trust 1991-91, Class S
$ 164,490 17.66% 07/25/98 $ 174,261
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(d)-0.0%
FNMA Remic Trust 1992-157, Class SA
$2,002,645/(b)/ 14.10% 03/25/04 $ 168,743
- --------------------------------------------------------------------------------
Inverse IOette-0.1%
FHLMC Series 1164, Class O
$ 36,128/(b)/ 29.44% 11/15/06 $ 489,372
- --------------------------------------------------------------------------------
IOette-0.1%
FNMA Remic Trust 1990-145, Class B
$ 27,091/(b)/ 10.00% 12/25/20 $ 657,906
- --------------------------------------------------------------------------------
Regular Floater CMOs(d)-1.4%
FHLMC Series 1011, Class F
$ 8,872,813 6.34% 11/15/20 $ 9,069,612
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs-0.4%
FNMA Remic Trust 1990-65, Class U
$ 616,589 9.50% 11/25/06 $ 619,475
FNMA Remic Trust 1991-37, Class E
1,664,339 8.50% 04/25/05 1,679,418
- --------------------------------------------------------------------------------
$ 2,298,893
- --------------------------------------------------------------------------------
Super Floater CMOs(d)-1.5%
FNMA Remic Trust 1992-157, Class FA
$ 9,859,177(b) 1.22% 03/25/04 $ 9,631,134
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 33,515,360
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $605,544,961) $604,783,125
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Repurchase Agreement-2.1%
Joint Repurchase Agreement Account
$ 13,000,000 5.58% 11/01/96/(a)/$ 13,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $13,000,000) $ 13,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $618,544,961/(c)/) $617,783,125
================================================================================
Futures contracts open at October 31, 1996:
</TABLE>
<TABLE>
<CAPTION>
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- --------------------------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
1-Month Libor 45 November 1996 $4,500
Euro Dollars 365 December 1996 309,500
Euro Dollars 280 March 1997 95,000
Euro Dollars 55 June 1997 28,000
5-Year U.S. Treasury Notes 67 December 1996 9,766
10-Year U.S. Treasury Notes (270) December 1996 (302,812)
----------------
$143,954
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Federal Income Tax Information:
<S> <C>
Gross unrealized gain for investments in which value
exceeds cost $ 2,404,589
Gross unrealized loss for investments in which cost
exceeds value (3,318,600)
- --------------------------------------------------------------------------------------
Net unrealized gain $ (914,011)
======================================================================================
</TABLE>
(a) Portions of these securities are being segregated for futures margin
requirements.
(b) Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
(c) The aggregate costs for federal income tax purposes is $618,697,136.
(d) Variable rate security. Coupon rate disclosed is that which is in effect
at October 31, 1996.
(e) Each Euro Dollar contract represents $1,000,000 in notional par value.
Each Libor contract represents $3,000,000 in notional par value. Each
5-Year and 10-Year U.S. Treasury Note and U.S. Treasury Bond contract
represents $100,000 in notional par value. The total notional amount and
market value are $879,000,000 and $200,909,125, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Government Fund's primary objective is to provide a
high level of current income by investing in a portfolio that consists of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including mortgage-backed securities as well as repurchase
agreements collateralized by such instruments. Under normal interest rate
conditions, the fund's duration is expected to be within one-half year of its
benchmark, the two-year U.S. Treasury security.
Performance Review
During the period under review, the fund's Institutional, Administration
and Service shares all outperformed the two-year U.S. Treasury security,
primarily due to our emphasis on and the favorable performance of
mortgage-backed security investments, as well as our ability to identify
relative value within the sector. In addition, the portfolio's term structure,
which overweighted one- and three-year maturity securities, also contributed to
performance when the yield curve steepened.
During the period, the net asset values (NAVs) of the fund's Institutional
and Administration shares (which opened February 28, 1996) were nearly unchanged
while the NAV of the fund's Service shares (which opened April 10, 1996) rose
$0.10 as interest rates stabilized and subsequently declined.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (4/10/96-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net 6.75% 4.00% 4.35%
asset value
- --------------------------------------------------------------------------------
Return From Monthly 6.65% 4.10% 3.32%
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.10% -0.10% 1.03%
Depreciation/
Appreciation
- --------------------------------------------------------------------------------
Total Return of Two-Year 5.64% 3.61% 3.71%
U.S. Treasury
- --------------------------------------------------------------------------------
NAV (10/31/96) $9.83 $9.85 $9.82
- --------------------------------------------------------------------------------
NAV Change +$0.01 -$0.01 +$0.10
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund performed well compared with its peers. The Institutional shares
ranked in the top 10% of short-intermediate U.S. government funds (fifth out of
88) based on total return for the 12-month period ended October 31, 1996,
according to Lipper Analytical Services, Inc. (The Administration and Service
shares were not ranked for this period because they were in existence less than
12 months. Please note that Lipper rankings do not take sales charges into
account and that past performance is not a guarantee of future results.)
Portfolio Composition and Investment Strategies
The fund significantly reduced its allocation in U.S. Treasuries in favor
of collateralized mortgage obligations (CMOs), which offered more attractive
return potential according to our analysis. This strategy proved successful as
mortgage-backed securities outperformed comparable-duration Treasuries.
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Repos/Cash Equivalents 1.1%
Fixed Rate Mortgage
Pass-Throughs 7.2%
U.S. Treasuries 15.8%
ARMs 19.0%
CMOs 56.9%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
9
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- --------------------------------------------------------------------------------
. CMOs. During the period, we more than doubled the portfolio's allocation in
collateralized mortgage obligations, with most of the increase occurring from
February through April. As of October 31, 56.9% of the portfolio was invested in
CMOs, of which 24.7% were sequential-pay CMOs (up from 10.4% last year) and
17.0% were planned amortization class (PAC) CMOs (up from 1.9% last year).
These sectors were favored for their relatively stable cash flows and
incremental yields over Treasuries, and they performed well during the period.
Though the CMO sector was fairly valued relative to equal-duration Treasuries
from January through the end of the period, our extensive research enabled us to
identify specific securities that presented attractive investment opportunities.
. ARMs. Adjustable rate mortgage securities (ARMs) accounted for 19.0% of the
portfolio as of October 31, down from 23.7% last year. We focused on seasoned
securities indexed to the one-year Constant Maturity Treasury (CMT), which
offered attractive income stability and low relative prepayment risk. A high
level of mortgage refinancing adversely impacted the sector in November and
December of 1995 when rates had eased, but ARMs strengthened when rates started
to rise during the first quarter of 1996 and prepayment fears faded.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The portfolio's
position in U.S. Treasuries was cut to 15.8%, down from 37.1% a year ago, as we
identified securities in other sectors that offered higher incremental yield. In
addition, repurchase agreements/cash equivalents were reduced to 1.1% from 4.7%
a year ago.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate pass-throughs, a 7.2%
allocation, offered more attractive yield spreads than most of the other
high-credit quality fixed income sectors. During the period under review, the
technical balance of the pass-through market strengthened, with investor demand
improving as prepayments and supply slowed from the high levels experienced last
November. We continued to emphasize seasoned premium mortgages because they
typically have lower prepayment risk than recently issued mortgages.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed security
holdings by issuer was 37.8% in Federal National Mortgage Association (FNMA)
issues, 36.0% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 9.2%
in Government National Mortgage Association (GNMA) issues.
. Credit Quality. The fund invests exclusively in issues of the U.S. government
and its agencies or instrumentalities.
. Prudent Use of Derivatives. Sequential-pay CMOs and PAC CMOs, which are
typically considered to be lower risk derivatives, represented 24.7% and 17.0%
of the portfolio, respectively, as noted earlier. Other derivative investments
included CMO floaters (10.0%), which are securities whose coupons reset upward
as interest rates rise, and inverse floaters (3.2%), which have coupons that
reset in the opposite direction from interest rates. When floaters are held
along with inverse floaters, they can produce a position with a similar risk
profile as a fixed rate pass-through but provide a higher yield. The fund also
held a small position (1.3%) in PAC interest-only securities (IOs). We invest in
such higher risk derivatives very sparingly in an effort to enhance returns
without taking undue risk. In addition, we used futures as a tool to help manage
the portfolio's duration.
Market Outlook
In general, we have a cautiously optimistic view of the mortgage-backed
securities market in the near term. In the ARM sector, we expect spreads to
remain stable due to strong investor demand and limited supply. Given the
environment of declining rates for the past few months, we will continue to
emphasize seasoned one-year CMT
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
- -------------------------------------------------------------------------------
ARMs due to the relative prepayment stability that these securities offer.
Though we have a neutral outlook for the CMO market, we continue to find areas
that offer attractive investment opportunities. In the mortgage pass-through
market, we believe the recent widening of yield spreads during September and
October has been somewhat overdone, but we will remain vigilant to an increase
in prepayments that may result from a further decline in interest rates. We will
continue to actively allocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
Distribution Policy
During the period under review, the fund's Institutional shares paid out
distributions of $0.63 per share. From their inceptions through October 31,
1996, the fund's Administration and Service shares distributed $0.39 per share
and $0.32 per share, respectively. (The Administration shares opened on February
28, 1996 and the Service shares opened on April 10, 1996.) The fund distributes
substantially all of its investment company taxable income, as required by tax
law.
We thank you for your support and look forward to continuing to meet your
investment needs in the future.
Sincerely,
/s/Jonathan A. Beinner
Jonathan A. Beinner
/s/James B. Clark
James B. Clark
Portfolio Managers
GS Short Duration Government Fund
November 29, 1996
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short-Term Government Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmarks, the U.S.
2-Year Treasury Bill ("2-Year T-Bill") and the Lehman Brothers Mutual Fund Short
(1-3) U.S. Government Index ("Lehman Short (1-3) Gov't Index"). All performance
data shown represents past performance and should not be considered indicative
of future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional Shares(a)
Institutional Shares 2-Year\r T-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
9/1/88 50,000 50,000 50,000
10/31/88 51,283 51,057 51,091
10/21/89 55,940 55,412 55,919
10/31/90 60,543 59,876 60,861
10/31/91 67,161 66,615 67,699
10/31/92 71,365 72,161 73,208
10/31/93 75,326 76,335 77,446
10/31/94 76,072 77,058 78,339
10/31/95 82,895 84,009 85,256
10/31/96 88,507 88,756 90,346
</TABLE>
Administration Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Administration Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
2/28/96 50,000 50,000 50,000
10/31/96 52,000 51,805 51,760
</TABLE>
Service Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Service Shares 2-Year\rT-Bill Lehman Short (1-3)rGov't
<S> <C> <C> <C>
4/10/96 50,000 50,000 50,000
10/31/96 52,175 51,855 52,110
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------
Average Annual Total Return
-----------------------------------------------------------
One Year Five Year Since Inception(b)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional shares 6.75% 5.6% 7.24%
- --------------------------------------------------------------------------------
Administrative shares N/A N/A 4.00(c)
- --------------------------------------------------------------------------------
Service shares N/A N/A 4.35(c)
- --------------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ The Institutional, Administration and Service shares commenced operations
August 15, 1988, February 28, 1996 and April 10, 1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--82.4%
Adjustable Rate Federal Home Loan Mortgage Corp.
(FHLMC)(a)--14.2%
$ 1,208,677 6.00% 11/15/16 $ 1,198,196
1,941,838 7.54 12/01/18/(b)/ 1,994,248
8,544,958 7.73 02/01/22/(b)/ 8,913,502
2,234,941 7.56 08/01/22 2,331,334
- --------------------------------------------------------------------------------
$ 14,437,280
- --------------------------------------------------------------------------------
Adjustable Rate Federal National Mortgage Association
(FNMA)(a)--6.2%
$ 389,769 9.00% 12/01/97 $ 402,558
2,732,146 7.80 11/01/14/(b)/ 2,849,984
3,025,230 7.48 08/01/22/(b)/ 3,093,842
- --------------------------------------------------------------------------------
$ 6,346,384
- --------------------------------------------------------------------------------
Fixed Rate Federal National Mortgage Association (GNMA)--3.5%
$ 1,093,610 6.00% 06/01/09/(b)/ $ 1,065,244
2,058,384 6.00 10/01/09/(b)/ 2,004,994
540,970 6.00 10/01/08/(b)/ 526,938
- --------------------------------------------------------------------------------
$ 3,597,176
- --------------------------------------------------------------------------------
Fixed Rate Government National Mortgage Association--3.3%
$ 3,040,068 10.00% 12/15/17/(b)/ $ 3,338,359
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations (CMOs)--55.3%
Inverse Floater(a)--5.7%
FHLMC Series 1296, Class J
$ 890,613 11.93% 07/15/99/(b)/ $ 948,502
FHLMC Series 1325, Class B
2,416,565 6.06 07/15/97/(b)/ 2,421,833
FHLMC Series 1325, Class C
1,028,325 7.56 07/15/97/(b)/ 1,034,598
FNMA Remic Trust 1991-127, Class S
144,496 12.98 09/25/98 153,084
FNMA Remic Trust, Series 1992-62, Class S
1,212,115 10.00 05/25/99 1,241,097
- --------------------------------------------------------------------------------
$ 5,799,114
- --------------------------------------------------------------------------------
Inverse Floating Rate - Interest Only(a)--0.3%
FHLMC Series 1684, Class JD
$ 2,801,277(c) 3.66% 08/15/20/(b)/ $ 199,759
FNMA Remic Trust 1993-110, Class SC
2,597,458(c) 3.46 04/25/19/(b)/ 126,990
- --------------------------------------------------------------------------------
$ 326,749
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
Mortgage Backed Obligations (continued)
Collateralized Mortgage Obligations (continued)
Planned Amortization Class (PAC CMOs)--11.1%
FHLMC Series 1584, Class E
$ 3,000,000 5.75% 10/15/16/(b)/ $ 2,954,040
FNMA Remic Trust 1992-138, Class C
2,350,000 6.00 12/25/18/(b)/ 2,325,020
GNMA Remic Trust 1996-6, Class PB
6,000,000 6.50 06/16/09 6,038,400
- --------------------------------------------------------------------------------
$ 11,317,460
- --------------------------------------------------------------------------------
Planned Amortization Class Interest-Only (PAC IO) CMOs--0.6%
FHLMC Series 1552, Class JE
$ 10,552,245/(c)/ 7.00% 02/15/14/(b)/ $ 590,926
- --------------------------------------------------------------------------------
Planned Amortization Class Ioette CMOs--0.5%
FNMA Remic Trust 1992-198, Class K
$ 42,908/(c)/ 16.00% 12/25/15 $ 547,555
- --------------------------------------------------------------------------------
Regular Floater (a)--9.9%
FHLMC Series 1684, Class F
$ 5,000,000 5.75% 08/15/20/(b)/ $ 4,818,750
FHLMC Series 1684, Class JC
2,801,277 5.34 08/15/20/(b)/ 2,737,352
FNMA Remic Trust 1993-110, Class FC
2,597,459 5.54 04/25/19/(b)/ 2,565,796
- --------------------------------------------------------------------------------
$ 10,121,898
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--27.1%
FHLMC Series 1033, Class G
$ 2,000,000 8.00% 01/15/06/(b)/ $ 2,095,620
FHLMC Series 1296, Class I
2,493,715 5.24 07/15/99/(b)/ 2,481,546
FHLMC Series 174, Class Z
3,757,885 10.00 08/15/21 4,189,703
FNMA Remic Trust 1988-12, Class A
4,076,171 10.00 02/25/18/(b)/ 4,350,090
FNMA Remic Trust 1988-12, Class B
3,218,030 4.47 02/25/18/(b)/ 3,081,585
FNMA Remic Trust 1989-12, Class X
1,955,861 10.00 12/25/14/(b)/ 2,021,246
FNMA Remic Trust 1989-18, Class B
1,312,493 9.50 01/25/04 1,359,730
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Government Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Mortgage Backed Obligations(continued)
Collateralized Mortgage Obligations(continued)
Sequential Fixed Rate CMOs (continued)
$ 4,628,657 7.75% 10/25/18 (b) $ 4,699,707
FNMA Remic Trust 1992-44, Class CA
3,000,000 12.00 08/25/20/(b)/ 3,394,800
- --------------------------------------------------------------------------------
$ 27,674,027
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 56,377,729
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $83,545,715) $ 84,096,928
- --------------------------------------------------------------------------------
U.S. Treasury Obligations--15.7%
United States Treasury Notes
$ 5,150,000 5.88% 04/30/98 $ 5,166,068
10,900,000 5.13 06/30/98/(b)/ 10,804,620
- --------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $15,894,705) $ 15,970,688
- --------------------------------------------------------------------------------
Repurchase Agreement--1.0%
Joint Repurchase Agreement Account
$ 1,000,000 5.58% 11/01/96/(b)/ $ 1,000,000
- --------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $1,000,000) $ 1,000,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $100,440,420(d)) $ 101,067,616
================================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts
Long Settlement Unrealized
Type (Short)(e) Month Gain (Loss)
- ------------------------- -------------- ------------------ ----------------
Euro Dollars 40 December 1996 $28,000
Euro Dollars 29 March 1997 34,650
Euro Dollars 37 June 1997 38,950
Euro Dollars 47 September 1997 68,625
Euro Dollars 45 December 1997 80,375
Euro Dollars 35 March 1998 25,250
Euro Dollars 20 June 1998 9,000
2 Year U.S. Treasury Notes 71 December 1996 87,859
5 Year U.S. Treasury Notes (89) December 1996 (173,203)
10 Year U.S. Treasury Notes (44) December 1996 (131,781)
20 Year U.S. Treasury Notes (7) December 1996 (34,844)
--------------
$32,881
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 826,961
Gross unrealized loss for investments in which
cost exceeds value (213,881)
- --------------------------------------------------------------------------------
Net unrealized gain $ 613,080
================================================================================
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for futures margin
requirements.
/(c)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(d)/The aggregate cost for federal income tax purposes is $100,454,536.
/(e)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
2-Year U.S. Treasury Note contract represents $200,000 in notional par
value. Each 5-Year U.S. Treasury Note, 10-Year U.S. Treasury Note, and 20-
Year U.S. Treasury Note contract represents $100,000 in notional par value.
The total notional amount and market value are $253,200,000 and
$89,469,788, respectively. The determination of notional amounts and market
value as presented here are indicative only of volume of activity and not a
measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Short Duration Tax-Free Fund seeks to provide a high level of
current income exempt from regular federal income tax, consistent with
relatively low principal volatility, through investments in municipal securities
rated single-A or better or deemed to be of comparable quality. Under normal
interest rate conditions, the fund's duration will be within one-half year of
its benchmark, the Lehman Brothers Three-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a three-year
bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a three-year municipal bond
(as calculated from data provided by Municipal Market Data, an independent
municipal market information provider) fell slightly (0.14%), while yields rose
from 4.10% on October 31, 1995 to 4.15% on October 31, 1996.
The municipal bond market began the period under review on a weak note.
Tax reform uncertainty impacted investor demand during November and December
1995, while municipal bond supply was high due to seasonably heavy year-end
issuance. The market environment improved during January and February 1996, when
fading tax reform concerns helped to revive investor interest in the sector and
issuance declined. From March through the end of the period, the market's
technical balance was generally healthy, though occasional spikes in supply
periodically overwhelmed demand and briefly impacted performance. The largest of
these surges occurred in June when supply rose to its highest level since late
1995, but subsequently both new issuance and secondary supply fell dramatically
from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (which control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[LINE GRAPH APPEARS HERE]
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review
The performance of the fund's Institutional shares was in line with the
benchmark, the Lehman Brothers Three-Year Municipal Bond Index (the "Index"),
for the 12-month period ended October 31, 1996. The Administration and Service
shares also performed well, but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
15
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary: October 31, 1995 - October 31, 1996
- --------------------------------------------------------------------------------
Lehman Brothers
Institu- Adminis- 3-Year
tional tration Service Municipal Bond Index
-------- -------- ------- ---------------------
<S> <C> <C> <C> <C>
Total Return (based on net 4.50% 4.24% 3.98% 4.51%
asset value)
- --------------------------------------------------------------------------------
Return From 4.30% 4.04% 3.78% NA
Monthly
Distributions
- --------------------------------------------------------------------------------
Return From Price 0.20% 0.20% 0.20% NA
Appreciation
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.96 $9.96 $9.97 NA
- --------------------------------------------------------------------------------
NAV Change +$0.02 +$0.02 +$0.02 NA
- --------------------------------------------------------------------------------
</TABLE>
The fund's positive performance during the period was primarily due to our
emphasis on higher yielding revenue bonds, as well as successful selection of
specific securities and relative value trades. As always, we did not make any
bets on the direction of interest rates, but rather kept the fund's duration in
line with the Index, occasionally using Treasury futures to actively manage
sector allocation.
In our search for incremental yield, we focused on three types of bonds.
The first category was relatively generic, highly liquid securities; the second
included slightly less liquid issues such as insured hospital bonds and
letter-of-credit-backed debt; and the last area was "story" bonds, such as
uninsured hospital and electric utility issues and multifamily housing revenue
bonds, whose value is often unrecognized by the market because they are unique
or generally not well understood. We identified attractive investment
opportunities for the third category through our extensive credit analysis.
We are pleased to report that the fund's Institutional shares ranked first
out of 26 funds in Lipper Analytical Services, Inc.'s short-intermediate
municipal debt category for the 12-month period ended October 31, 1996 based on
total return. (Lipper did not rank the fund's Administration and Service shares.
Please note that Lipper rankings do not take sales charges into account and that
past performance is not a guarantee of future results.) In addition, as of
October 31, 1996, the fund's Institutional shares were rated "five stars" by
Morningstar, Inc., its highest rating./1/
Portfolio Composition and Investment Strategies:
Revenue Bonds Dramatically Increased
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
General Obligations 3.0%
Variable Rate Demand Notes 4.7%
Insured General Obligations 12.6%
Insured Revenue Bonds 24.2%
Revenue Bonds 55.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- ----------------------------
1 Source: (C) 1996 Morningstar, Inc. All rights reserved. Morningstar
proprietary ratings reflect historical risk-adjusted performance as of 10/31/96.
The ratings are subject to change every month. Past performance is no guarantee
of future results. Morningstar ratings are calculated from a fund's three-,
five-, and ten-year average annual returns (where applicable) in excess of
90-day Treasury bill returns with appropriate fee and sales charge adjustments
and a risk factor that reflects fund performance below 90-day Treasury bill
returns. The one-year rating is calculated using the same methodology, but is
not a component of the overall rating. The fund's Institutional shares received
five stars and were rated among 1,038 municipal bond funds for the three-year
period. For the one-year period, the Institutional shares received five stars
and were rated among 1,728 municipal bond funds. 10% of the funds receive the
five-star rating. The Morningstar rating applies only to the fund's
Institutional shares; the fund's Administration and Service shares have not been
rated. Administration and Service shares are subject to additional fees that may
have the effect of lowering performance and may affect any future Morningstar
rating. Morningstar rates funds against their peers in the same category. In
all, there are five Morningstar categories (domestic equity, international
equity, fixed income, municipal and hybrid). Morningstar ratings range from five
stars (highest) to one star (lowest). Funds with five-star ratings are in the
top 10% of their category, four-star ratings in the next 22.5%, three stars the
next 35%, two stars the next 22.5% and one star the lowest 10% of their
categories.
- --------------------------------------------------------------------------------
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------
. Revenue Bonds. As of October 31, the portfolio's combined position in
insured and uninsured revenue bonds was significantly overweighted compared with
the Index, 79.7% versus 35.8%. We substantially increased the portfolio's total
revenue bond allocation (from 29.2% a year ago) because our emphasis on credit
analysis enabled us to identify attractive revenue bonds that offered higher
incremental yield than was available from general obligation bonds. (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. The fund's allocation in insured and
uninsured GO bonds was dramatically cut during the period to 15.6% of the
portfolio, down from 51.0% a year ago and significantly underweighted versus the
Index's 55.5%. GOs are backed by the general taxing power of a municipality and
are typically higher credit quality but lower yielding than revenue bonds.
. Variable Rate Demand Notes (VRDNs). VRDNs are high-quality cash
equivalents that we used to manage the portfolio's excess liquidity. VRDNs
were a 4.7% position, down from 10.0% a year ago.
. Pre-refunded Bonds. Over the course of the year, we trimmed the fund's
holdings in pre-refunded bonds (9.8% as of October 31, 1995). In October, we
sold the fund's remaining position in the sector in favor of revenue bonds that
offered more attractive yields.
. Duration. As of October 31, the fund's duration was in line with that of
the Index at 2.7 years.
. Credit Quality. During the year, the fund's credit quality allocations
shifted. We reduced the portfolio's allocation in triple-A-rated GOs in favor of
single-A-rated revenue bonds, which allowed us to maintain the fund's targeted
double-A-rated average credit quality and liquidity while achieving higher
overall yields. We structured the portfolio's credit-quality allocation like a
"barbell," emphasizing higher credit quality securities in the four- to five-
year maturity range and lower relative credit quality securities in the one- to
three-year maturity range. As of October 31, more than half of the portfolio was
invested in triple-A-rated bonds (52.7%), while double-A- and single-A-rated
securities accounted for 20.1% and 27.2%, respectively.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
Dividends are declared daily and paid on a monthly basis. During the
12-month period ended October 31, 1996, the fund's Institutional, Administration
and Service shares paid out monthly distributions totaling approximately $0.42,
$0.39 and $0.37 per share, respectively. The fund intends to distribute
substantially all of its investment company tax-exempt income, as required by
tax law.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
- --------------------------------------------------------------------------------
We value your continued confidence in the GS Short Duration Tax-Free Fund
and look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
GS Short Duration Tax-Free Fund
November 29, 1996
- --------------------------------------------------------------------------------
18
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Short Duration Tax-Free Fund based on the Fund's normal
minimum initial investment of $50,000, is compared to its benchmark, the Lehman
Brothers 3-Year Municipal Bond Index ("3-Year Bond Index"). All performance data
shown represents past performance and should not be considered indicative of
future performance which will fluctuate as market conditions change. The
investment return and principal value of an investment will fluctuate with
changes in market conditions so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT/(a)/
[GRAPH APPEARS HERE]
Institutional Shares
<TABLE>
<CAPTION>
Institutional Shares 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/92 50000 50000
- --------------------------------------------------------------------------------
10/31/92 49830 49805
- --------------------------------------------------------------------------------
10/31/93 53333 53102
- --------------------------------------------------------------------------------
10/31/94 53424 53825
- --------------------------------------------------------------------------------
10/31/95 56618 58023
- --------------------------------------------------------------------------------
10/31/96 59172 60646
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Administration Shares
<TABLE>
<CAPTION>
Admin 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
6/1/93 50000 50000
- --------------------------------------------------------------------------------
10/31/93 51088 51144
- --------------------------------------------------------------------------------
10/31/94 51031 51840
- --------------------------------------------------------------------------------
10/31/95 53971 55884
- --------------------------------------------------------------------------------
10/31/96 56265 58410
- --------------------------------------------------------------------------------
</TABLE>
[GRAPH APPEARS HERE]
Service Shares
<TABLE>
<CAPTION>
Service 3yr Bond Index
- --------------------------------------------------------------------------------
<S> <C> <C>
10/1/94 50000 50000
- --------------------------------------------------------------------------------
10/31/94 49810 49880
- --------------------------------------------------------------------------------
10/31/95 52594 53771
- --------------------------------------------------------------------------------
10/31/96 54693 56201
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
Average Annual Total Return
------------------------------------
One Year Since Inception/(b)/
-----------------------------------------------------------
<S> <C> <C>
Institutional Shares 4.50% 4.21%
-----------------------------------------------------------
Administration Shares 4.24% 3.51%
-----------------------------------------------------------
Service Shares 3.98% 4.36%
-----------------------------------------------------------
</TABLE>
/(a)/For comparative purposes, initial investments are assumed to be made on the
first day of the month following the commencement of operations of the
Administration and Service share classes.
/(b)/The Institutional, Administration and Service shares commenced operations
October 1, 1992, May 20, 1993 and September 20, 1994, respectively.
- --------------------------------------------------------------------------------
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Obligation--98.2%
Alabama--2.8%
Selma, AL IDA for International Paper Co. PCRB (A-/A3)
$1,000,000 4.15% 07/15/08 $1,000,000
- --------------------------------------------------------------------------------
Arkansas--3.8%
West Memphis, AR Public Utility System RB (MBIA) (NR/Aaa)
$1,310,000 5.25%(e) 12/01/00 $1,344,388
- --------------------------------------------------------------------------------
Colorado--4.2%
Municipal Sub District of Northern Colorado Water Conservation Co.
RB(AMBAC)(AAA/Aaa)
$1,435,000 5.75% 12/01/01 $1,508,845
- --------------------------------------------------------------------------------
Connecticut--4.3%
Connecticut State Resource Recovery Authority Series A RB (AA-/NR)
$1,500,000 5.60% 11/15/99 $1,546,185
- --------------------------------------------------------------------------------
Illinois--4.4%
Chicago, IL GO (MBIA) (AA/Aaa)
$1,500,000 5.40% 10/31/00 $1,547,670
- --------------------------------------------------------------------------------
Kentucky--7.5%
Jefferson County, KY Trust Certificates (A+/NR)RB
$1,145,000 5.25% 03/01/99 $1,163,904
Pendleton County, KY LOC (Self Insurance)(NR/VMIG1)
1,500,000 4.25 07/01/01 1,503,045
- --------------------------------------------------------------------------------
$2,666,949
- --------------------------------------------------------------------------------
Louisiana--7.4%
Louisiana Offshore Deepwater Part Authority Term B RB (A/Baa1)
$1,000,000 5.85% 09/01/00 $1,040,080
Louisiana State Refunding RB, Series A GO (FGIC) (AAA/Aaa)
1,500,000 6.00 08/01/01 1,583,970
- --------------------------------------------------------------------------------
$2,624,050
- --------------------------------------------------------------------------------
New Jersey--4.0%
West Windsor/Plainsboro, NJ Regional School District (FGIC)
(AAA/Aaa)
$1,400,000 5.25% 12/01/99 $1,436,750
- --------------------------------------------------------------------------------
New York--6.8%
Municipal Assistance Corp. Refunding RB (AMBAC) (AAA/Aaa)
$1,000,000 6.00% 07/01/00 $1,051,690
Syracuse, NY IDA RB (AA/NR)
$1,365,000 4.60% 10/15/98 $1,369,491
- --------------------------------------------------------------------------------
$2,421,181
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Oklahoma--13.5%
Enid, OK Hospital Authority RB (Societe Generale LOC) (NR/Aa2)
$2,700,000 6.63%(a) 10/01/15 $2,747,115
Southern Oklahoma Memorial Hospital RB(b) (A/A)
2,000,000 5.60 02/01/00 2,043,680
- -------------------------------------------------------------------------------
$4,790,795
- -------------------------------------------------------------------------------
Oregon--4.2%
Klamath Falls, OR Salt Caves Hydroelectic RB (SP1+/NR)
$1,500,000 4.50% 05/01/23 $1,507,980
- -------------------------------------------------------------------------------
Pennsylvania--9.7%
Pennsylvania Intergovernmental Cooperative Authority Special Tax RB
(FGIC) (AAA/Aaa)
$1,500,000 5.75% 06/15/00 $1,559,730
Philadelphia, PA Gas Works COPS (FSA) (AAA/Aaa)
1,800,000 5.95 04/01/00 1,879,146
- --------------------------------------------------------------------------------
$3,438,876
- --------------------------------------------------------------------------------
Texas--11.4%
Bexar County, TX MFH Finance Corp. RB (CFMG) (NR/A3)
$1,500,000 4.88% 11/01/04 $1,502,220
Houston, TX Water & Sewer RB Series B (A/A)
1,430,000 5.25 12/01/99 1,460,802
Port Neches, TX Independent School District GO (AAA/Aaa)
1,000,000 7.00 02/15/01 1,092,480
- -------------------------------------------------------------------------------
$4,055,502
- -------------------------------------------------------------------------------
Virginia--5.0%
Petersburg, VA Hospital Authority RB (NR/A)
$1,760,000 5.50% 07/01/99 $1,798,157
- -------------------------------------------------------------------------------
Washington--4.6%
Washington State Public Power Supply System RB, Series B (AA-/Aa1)
$1,500,000 7.20% 07/01/02 $1,623,044
- -------------------------------------------------------------------------------
Wyoming--4.6%
Uinta County, WY School District GO, Series A (FSA) (AAA/Aaa)
$1,500,000 6.88% 06/01/00 $1,620,390
- -------------------------------------------------------------------------------
Total Debt Obligations
(Cost $34,727,338) $34,930,762
===============================================================================
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
- --------------------------------------------------------------------------------
GS Short Duration Tax-Free Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Short-Term Obligations--4.5%
Illinois--0.6%
Illinois Development Finance Authority RB (AA+/A-1)/(c)/
$200,000 3.55% 01/1/96 $200,000
Louisiana--3.9%
East Baton Rouge Parish PCRB (AAA/Aaa)/(c)/
$1,400,000 3.60% 11/1/96 $1,400,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $1,600,000) $ 1,600,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $36,328,338)/(d)/ $36,530,762
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 204,715
Gross unrealized loss for investments in which
cost exceeds value (2,291)
- --------------------------------------------------------------------------------
Net unrealized gain $ 202,424
================================================================================
</TABLE>
/(a)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(b)/Portions of these securities are being segregated for when-issued
securities.
/(c)/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next reset interest dates.
/(d)/The amount stated also represents aggregate cost for federal income tax
purposes.
/(e)/When-issued securities.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal Bond Assurance Corp.
CFMG --Credit Lyonnais Line of Credit
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors Assurance
NR --Not Rated
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The GS Core Fixed Income Fund seeks to achieve a total return consisting of
capital appreciation and income that exceeds the total return of its benchmark,
the Lehman Brothers Aggregate Bond Index (the "Index"), through a diversified
portfolio of fixed income securities. The fund may invest in U.S. Treasury,
agency, corporate, mortgage-backed and asset-backed securities, as well as in a
limited amount of non-dollar-denominated fixed income securities. While the
fund's performance will be measured against the Index, the portfolio is not
required to hold the same securities or match the sector weightings of the
Index. Every security in the portfolio must be rated at least investment grade
by an independent rating agency or be considered to be of equivalent quality by
Goldman Sachs Asset Management at the time it is purchased. The fund's
approximate interest rate sensitivity is expected to be comparable to that of a
five-year bond.
Performance Review
During the period under review, the fund's Institutional shares outperformed
the Index. The strong performance was primarily due to its investments in
corporate bonds and emerging market debt. In addition, the fund also benefited
from its mortgage-backed and asset-backed holdings when both sectors
strengthened during the period.
The fund fared well relative to its peers. For the 12-month period ended
October 31, 1996, the fund's Institutional shares ranked in the top quartile
(24th out of 96 funds) in Lipper Analytical Services, Inc.'s "corporate debt -
BBB-rated" category based on total return. (Lipper did not rank the fund's
Administration and Service shares for the period because they were in existence
less than 12 months. Please note that Lipper rankings do not take sales charges
into account and that past performance is not a guarantee of future results.)
The fund's Administration and Service shares, which began operations on
February 28, 1996 and March 13, 1996, respectively, achieved positive returns
since their inceptions.
During the period, the net asset value (NAV) of the fund's Institutional
shares fell $0.15 due to the sharp rise in interest rates during the first half
of 1996. Reflecting the fact that rates had already risen significantly, the NAV
of the fund's Administration shares (which opened in February) also declined but
not as significantly, while the NAV of the fund's Service shares (which opened
in March) rose $0.09.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Performance Summary
- -------------------------------------------------------------------------------
Institutional Administration* Service*
(10/31/95- (2/28/96- (3/13/96-
10/31/96) 10/31/96) 10/31/96)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Return (based on 5.98% 3.56% 4.90%
net asset value)
- -------------------------------------------------------------------------------
Return From Monthly 7.48% 4.27% 3.98%
Distributions
- -------------------------------------------------------------------------------
Return From Price -1.50% -0.71% 0.92%
Depreciation/
Appreciation
- -------------------------------------------------------------------------------
Total Return of Lehman 5.83% 3.74% 4.94%
Brothers Aggregate
Bond Index
- -------------------------------------------------------------------------------
NAV (as of 10/31/96) $9.85 $9.84 $9.86
- -------------------------------------------------------------------------------
NAV Change -$0.15 -$0.07 +$0.09
- -------------------------------------------------------------------------------
</TABLE>
*New share class opened during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Corporate Bonds 26.6%
Fixed Rate Mortgage Pass-Throughs 23.9%
U.S. Treasuries 19.5%
ABSs 12.5%
CMOs 9.8%
Emerging Market Debt 4.5%
Repos/Cash Equivalents 1.7%
Agency Debentures 1.5%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Corporate Bonds. As of October 31, the fund's largest allocation was in
corporate bonds, overweighted relative to the Index (26.6% versus 17.6%),
which significantly benefited performance. Though corporate bonds began the
period on a weak note due to the economic slowdown during November and December,
the sector improved dramatically when companies reported positive earnings
growth from January 1996 through the end of the period. Within the sector, we
stressed industrial and financial issues. Industrials performed well due to the
strengthening economy, while financials benefited from the relatively steep
yield curve, which enabled issuers to borrow at lower, short-term rates and lend
at higher, long-term rates.
. Fixed Rate Mortgage Pass-Throughs. Fixed rate mortgage pass-throughs, a
23.9% position as of October 31, were underweighted compared with the Index
(29.7%), with the remainder of the fund's mortgage-backed security allocation
invested in collateralized mortgage obligations (CMOs). We emphasized seasoned
premium mortgages, which have lower prepayment risk than recently issued
mortgages. The sector suffered from high prepayments during November and
December 1995, but conditions improved when interest rates rose sharply during
the first half of 1996 and prepayments declined. Over the course of the year,
these securities positively contributed to the fund's performance.
During the period, we occasionally used mortgage dollar rolls to benefit from
short-term supply and demand imbalances in the mortgage settlement process.
(Mortgage dollar rolls refer to transactions that involve selling mortgage
securities owned by the fund and simultaneously contracting to buy back similar
mortgage securities with the same coupon on a specified future date -- usually
one month forward.) At all times, we "cover" the mortgage dollar rolls by
keeping cash or high-grade liquid debt securities equal to the dollar amount of
the forward commitment in a segregated account with the fund's custodian.
. CMOs. During the period, we increased the portfolio's CMO allocation to
9.8%, up from 2.0% a year earlier. Within the sector, we initiated a
position in sequential-pay/support CMOs (5.1% as of October 31) and increased
the portfolio's position in planned amortization class (PAC) CMOs to 3.5% from
0.9%. These securities were favored for their relative stability and attractive
spreads compared with Treasuries, and they benefited performance during the
period. The remaining CMO positions were inverse floaters, discussed below.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. The fund's
allocation in U.S. Treasuries was reduced to 19.5% from 24.7% a year ago. We
significantly underweighted Treasuries relative to the benchmark (45.2%) to
focus on other sectors that offered more attractive relative value. In addition,
repurchase agreements/cash equivalents accounted for 1.7% of the portfolio, up
from 0.4% a year ago.
. Asset-Backed Securities (ABSs). We increased the fund's allocation in ABSs to
12.5%, up from 9.9% a year ago. The ABS position consisted of short-term,
high-credit-quality issues primarily backed by credit card loans, as well as
smaller positions in automobile loan debt and other receivables, that offered
incremental yield over similar-duration Treasuries. When the period under review
began, the ABS market was weak due to uncertainty regarding credit card
delinquencies, but those concerns waned and the sector strengthened from January
through October. The supply of ABSs was robust during the period, with a wide
variety of innovative new issues across a range of maturities, collateral types
and structures. Despite the increased issuance, the technical balance of the ABS
market remained favorable due to heavy investor demand from foreign banks,
insurance companies and an increasing number of corporate "crossover" accounts.
- --------------------------------------------------------------------------------
23
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
. Emerging Market Debt. The portfolio's investments in emerging market debt
(4.5%) performed extremely well during the period. We carefully managed the
fund's exposure in the sector by stressing higher credit-quality, short-duration
bonds. Geographically, we emphasized Latin American countries because we believe
this region has the best risk/reward characteristics. During the period, we
focused on bonds from Chile, Colombia and the Andean region development bank. We
also initiated a new position in investment-grade Mexican bonds.
. Agency Debentures. Agency debentures, a small position (1.5%), added to the
portfolio's diversification and contributed incremental yield. However, we
underweighted the sector relative to the Index (6.5%) because our analysis
indicated that it did not adequately compensate us given its level of risk.
. Duration. As of October 31, the fund's duration matched that of the Index at
4.7 years. Rather than attempting to predict the direction of interest rates, we
manage the fund's duration to approximate that of the Index, partly through the
use of financial futures. We seek to add incremental return over the Index
through sector weighting and individual security selection.
. Credit Quality. More than half of the portfolio was invested in government
and agency securities (51 .1%), with another 12.6% invested in triple-A-rated
securities. The remainder of the portfolio was made up of double-A-rated
securities (2.7%), single-A-rated securities (12.5%), triple-B-rated
securities (19.4%) and cash equivalents
(1.7%).
. Prudent Use of Derivatives. As noted, the portfolio held positions in asset-
backed securities (12.5%), sequential-pay/support CMOs (5.1%) and PAC CMOs
(3.5%), which are all typically considered to be lower risk derivatives. In
addition, we held a 1.2% position in inverse floaters, which are securities
whose coupons reset in the opposite direction from interest rate movements.
These securities performed well during the period, offering incremental yield
over Treasuries.
Market Outlook
We are somewhat cautious on the corporate bond sector as it has become
expensive relative to Treasuries, but expect the sector to continue to benefit
from strong technical and fundamental factors. We intend to continue to
overweight industrial and financial issues and underweight utilities due to
their regulatory and competitive pressures. In the mortgage pass-through market,
certain segments are attractively valued, and we believe that our current
seasoned holdings should fare well relative to other sectors if interest rates
were to continue to fall and increase the level of prepayments. We are
cautiously optimistic on the ABS market, where we expect the sector's
significant spread premiums relative to comparably rated corporate securities to
continue to buoy investor demand. In addition, Fed surveys indicate that banks
have been tightening their underwriting standards over the last three quarters,
which should help to allay lingering investor concerns surrounding consumer
credit card delinquencies. Finally, we remain optimistic on the prospects for
the relative performance of emerging market debt, which continues to offer good
value compared with other asset classes. Overall, the economic trends in
emerging markets appear to be headed in the right direction and the
globalization of financial markets is likely to increase investor interest in
the sector. During the coming year, we will continue to actively allocate the
portfolio's assets among the various fixed income sectors as their relative
value changes.
Distribution Policy
During the 12-month period under review, the fund's Institutional shares
distributed $0.72 per share. From their inceptions through October 31, the
fund's Administration and Service shares paid out $0.41 and $0.38 per share,
respectively. (The Administration shares' inception date was on February 28,
1996, and the Service shares' inception date was on March 13, 1996.) Dividends
are
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
- --------------------------------------------------------------------------------
declared daily and paid on a monthly basis. As required by tax law, the fund
distributes substantially all of its investment company taxable income.
In closing, we appreciate your investment and look forward to serving you in
the future.
Sincerely,
/s/ Jonathan A Beinner
Jonathan A Beinner
/s/ Richard H. Buckholz
Richard H. Buckholz
/s/ C. Richard Lucy
C. Richard Lucy
/s/ Stephen R. Warren
Stephen R. Warren
Portfolio Managers
GS Core Fixed Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund
- --------------------------------------------------------------------------------
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the GS Core Fixed Income Fund based on the Fund's normal minimum
initial investment of $50,000, is compared to its benchmark, the Lehman Brothers
Aggregate Bond Index ("Lehman Aggregate Index"). All performance data shown
represents past performance and should not be considered indicative of future
performance which will fluctuate as market conditions change. The investment
return and principal value of an investment will fluctuate with changes in
market conditions so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
HYPOTHETICAL $50,000 INVESTMENT
[GRAPH APPEARS HERE] [GRAPH APPEARS HERE] [GRAPH APPEARS HERE]
Institutional Shares/(a)/ Administration Shares Service Shares
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 48500 10/31/96 51780 10/31/96 52450
10/31/95 56124
10/31/96 59492
Lehman Aggregate Index Lehman Aggregate Index Lehman Aggregate Index
1/5/94 50000 2/28/96 50000 3/13/96 50000
10/31/94 46980 10/31/96 51870 10/31/96 52470
10/31/95 54332
10/31/96 57505
<TABLE>
<CAPTION>
------------------------ -----------------------------------------------------
Average Annual Total Return
------------------------ -----------------------------------------------------
One Year Since Inception/(a)/
<S> <C> <C>
------------------------ ---------------------------- ------------------------
Institutional Shares 5.98% 6.34%
------------------------ ---------------------------- ------------------------
Administration Shares N/A 3.56/(b)/
------------------------ ---------------------------- ------------------------
Service Shares N/A 4.90/(b)/
------------------------ ---------------------------- ------------------------
</TABLE>
(a) The Institutional, Administration and Service shares commenced operations
January 5, 1994, February 28, 1996 and March 13, 1996, respectively
(b) An aggregate total return (not annualized) is shown instead of an average
annual total return since the Administration and Service shares have not
completed a full twelve months of operations.
- --------------------------------------------------------------------------------
26
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
GS Core Fixed Income Fund
October 31, 1996
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds--26.8%
Finance Bonds--12.6%
BankAmerica Corp.
$ 20,000 6.03% 05/17/99 $ 201,724
Bear Stearns Mortgage Securities, Inc.
2,045,784 6.50 03/28/09 1,903,048
Capital One Bank
600,000 8.63 01/15/97 603,000
500,000 8.13 02/27/98 511,610
Comdisco Inc.
950,000 9.75 01/15/97 956,717
200,000 7.33 03/06/97 201,112
Conseco Inc.
340,000 10.50 12/15/04 402,688
Continental Bank N.A.
525,000 11.25 07/01/01 565,971
Countrywide Funding Corp.
125,000 6.08 07/14/99 124,166
250,000 8.43 11/16/99 263,653
250,000 7.75 08/10/01 259,800
Ford Capital Corp.
200,000 9.38 01/01/98 207,584
300,000 9.50 07/01/01 333,960
General Motors Acceptance Corp.
275,000 7.63 03/09/98 281,064
200,000 7.13 05/10/00 204,238
375,000 9.63 12/15/01 422,483
Meditrust, Inc.
240,000 7.82 09/10/26 258,144
Security Pacific Corp.
995,000 11.50 11/15/00 1,268,429
Signet Banking Corp.
240,000 9.63 06/01/99 257,527
Washington Real Estate Corp.
120,000 7.13 08/13/03 120,307
- ---------------------------------------------------------------------
$ 9,247,225
- ---------------------------------------------------------------------
Industrial Bonds--13.7%
360 Communications Co.
$ 525,000 7.13% 03/01/03 $ 520,312
Auburn Hills Trust
210,000 12.00 05/01/20 316,730
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
=====================================================================
Corporate Bonds (continued)
Industrial Bonds (continued)
Cablevision Industries Corp.
$ 150,000 10.75% 01/30/02 $ 162,534
Continental Airlines, Inc.
349,679 7.75 07/02/14 364,513
569,776 8.56 07/02/14 620,880
Ford Holdings, Inc.
300,000 9.25 03/01/00 325,581
Mitchell Energy & Development Corp.
400,000 8.00 07/15/99 410,020
News America Holdings, Inc.
350,000 9.13 10/15/99 375,340
150,000 7.50 03/01/00 154,083
Northwest Airlines Corp.
167,795 8.26 03/10/06 179,500
575,000 8.97 01/02/15 605,573
RJR Nabisco Inc.
175,000 8.00 07/15/01 175,334
450,000 8.63 12/01/02 456,467
Tele-Communications, Inc.
50,000 6.46 03/06/00 49,465
300,000 8.25 01/15/03 296,652
1,135,000 6.27 09/15/03 1,132,764
Tenneco Inc.
1,175,000 10.00 08/01/98 1,249,178
Time Warner, Inc.
1,650,000 7.95 02/01/00 1,708,410
400,000 7.98 08/15/04 409,452
U.S. Air Inc.
560,072 6.76 04/15/08 547,711
- ---------------------------------------------------------------------
$10,060,499
- ---------------------------------------------------------------------
Utility Bonds--0.5%
Central Maine Power Co.
$ 330,000 7.45% 08/30/99 $ 329,248
- ---------------------------------------------------------------------
$ 329,248
- ---------------------------------------------------------------------
Total Corporate Bonds
(Cost $19,435,482) $19,636,972
- ---------------------------------------------------------------------
Asset-Backed Securities--12.2%
Airplanes Pass Through Trust Series 1, Class C
$ 155,000 8.15% 03/15/19 $ 159,816
- ---------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
27
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C> <C>
Asset-Backed Securities (continued)
Chevy Chase Auto Receivables Trust Series 1995-2, Class A
$ 232,121 5.80% 06/15/02 $ 231,466
Discover Card Master Trust, Series 1996-4, Class A
1,910,000 5.76 10/16/13 1,926,101
Discover Card Master Trust, Series 1996-4, Class B
1,100,000 5.93 10/16/13 1,100,000
General Motors Acceptance Corp. Series 1995, Class A
99,367 7.15 03/15/00 100,546
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
291,994 6.55 11/20/01 293,725
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
314,669 6.85 06/15/01 318,757
Premier Auto Trust Series 1995-1, Class A4
360,000 7.85 09/04/98 362,023
Premier Auto Trust Series 1995-1, Class A5
80,000 7.90 05/04/99 81,150
Sears Credit Account Master Trust, Series 1996-1, Class A
680,000 6.20 02/16/06 675,750
Sears Credit Account Master Trust, Series 1995-2, Class A
550,000 8.10 06/15/04 577,500
Sears Credit Card Master Trust, Series 1995-3, Class A
300,000 7.00 10/15/04 306,561
Standard Credit Card Trust, Series 1990-3, Class A
1,120,000 9.50 07/10/98 1,140,294
Standard Credit Card Trust, Series 1990-6, Class B
900,000 9.63 09/10/98 924,183
Standard Credit Card Trust, Series 1994-4, Class A
680,000 8.25 11/07/03 726,111
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $8,987,847) $8,923,983
- --------------------------------------------------------------------------------
Emerging Market Debt--3.9%
Bancoldex
$ 160,000 8.63% 06/02/00 $ 164,731
Corp. Andina de Fomento
200,000 7.25 04/30/98 202,294
40,000 8.38 07/29/01 40,698
Empresa Col Petroleos
900,000 7.25 07/08/98 904,563
Financiera Energy Nacional
530,000 6.63 12/13/96 534,400
160,000 9.38 06/15/06 165,234
- --------------------------------------------------------------------------------
Emerging Market Debt (continued)
Instituto de Fomento Industrial
$ 80,000 8.38% 07/29/01 $ 81,397
Korea Electric Power
266,952 7.40 04/01/16 269,197
YPF Sociedad Anonima
456,886 7.50 10/26/02 463,036
- --------------------------------------------------------------------------------
Total Emerging Market Debt
(Cost $2,799,425) $2,825,550
- --------------------------------------------------------------------------------
Government Bonds--0.9%
Province of Quebec
$ 520,000 13.25% 09/15/14 $ 630,058
- --------------------------------------------------------------------------------
Total Government Bonds
(Cost $653,628) $ 630,058
- --------------------------------------------------------------------------------
Mortgage Backed Obligations--31.1%
Federal Home Loan Mortgage Corp. (FHLMC((b)
$4,500,000 7.50% TBA-30 Yr(b) $4,515,435
1,208,677 6.00 TBA-30 Yr(b) 1,198,196
Federal National Mortgage Association (FNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,930
1,000,000 8.00 11/15/16 1,020,000
126,229 8.50 06/01/06 131,790
125,861 8.50 09/01/06 131,406
720,814 8.50 03/01/10 752,213
500,000 6.25 07/25/18 492,810
989,360 7.00 02/01/26 970,493
1,000,001 8.50 07/01/26 1,034,681
FNMA Remic Trust, Series 1993-201G
1,000,000 3.50 05/25/19 871,560
GE Capital Mortgage Services, Inc. Series 1994-17, Class A10
2,000,000 7.00 05/25/24 1,842,500
Government National Mortgage Association (GNMA)
1,000,000 7.00 TBA-30 Yr(b) 980,620
1,000,000 7.50 TBA-30 Yr(b) 1,003,120
3,000,000 8.00 TBA-30 Yr(b) 3,067,500
1,000,000 8.50 TBA-30 Yr(b) 1,038,120
342,966 8.00 02/15/17 356,042
850,876 7.50 03/15/23 857,785
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
- ----------------------------------------------------------------------
GS Core Fixed Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
======================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations(continued)
Government National Mortgage Association (GNMA)--(continued)
$ 512,583 7.00% 08/15/23 $ 505,699
124,369 7.50 08/15/23 125,379
Prudential Home Mortgage Securities Corp., Series 1992-39 A8
1,000,000 7.74 12/25/07 892,270
- ----------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $22,482,170) $22,768,549
- ----------------------------------------------------------------------
Sovereign Credit--1.3%
United Mexican States
$ 650,000 7.69% 08/06/01 $ 658,769
State of Israel
300,000 6.38 12/15/05 286,611
- ----------------------------------------------------------------------
Total Sovereign Credit
(Cost $926,260) $ 945,380
- ----------------------------------------------------------------------
U.S. Government Agency Obligations--1.5%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 300,000 8.20% 01/16/98 $ 301,734
250,000 6.83 09/18/02 249,023
Resolution Funding Corp. Principal-Only Stripped Securities/(c)/
1,790,000 7.08 10/15/20 335,392
1,140,000 7.08 01/15/21 210,136
- ----------------------------------------------------------------------
Total U.S. Government Agency Obligations
(Cost $1,058,170) $ 1,096,285
- ----------------------------------------------------------------------
U.S. Treasury Obligations--19.3%
United States Treasury Bonds
$ 3,900,000 8.75% 05/15/17 $ 4,772,625
30,000 8.88 08/15/17 37,153
150,000 8.75 08/15/20 185,180
120,000 7.88 02/15/21 135,900
United States Treasury Interest-Only Stripped Securities/(d)/
2,250,000 6.69 08/15/09 968,063
350,000 6.75 11/15/10 137,736
United States Treasury Notes
1,200,000 5.88 04/30/98 1,203,744
3,250,000 6.88 08/31/99 3,331,250
100,000 6.13 07/31/00 100,375
2,090,000 7.88 11/15/04 2,293,775
United States Treasury Principal-Only Stripped Securities/(c)/
40,000 5.54 11/15/97 37,792
590,000 6.41 11/15/04 354,885
2,920,000 6.95 05/15/20 581,460
- ----------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $13,792,338) $14,139,938
- ----------------------------------------------------------------------
Repurchase Agreements--19.0%
Joint Repurchase Agreement Account/(a)/
$ 13,900,000 5.58% 11/01/96 $13,900,000
- ----------------------------------------------------------------------
Total Repurchase Agreements
(Cost $13,900,000) $13,900,000
- ----------------------------------------------------------------------
Total Investments
(Cost $84,035,320/(e)/) $84,866,715
======================================================================
</TABLE>
Futures contracts open at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Number of
Contracts Settlement Unrealized
Type Long (f) Month Gain
- ------------------------- ------------ --------------- ------------
<S> <C> <C> <C>
Euro Dollars 5 December 1996 $5,125
Euro Dollars 5 March 1997 6,875
Euro Dollars 3 September 1997 825
Euro Dollars 5 June 1997 7,500
Euro Dollars 5 June 1998 3,625
5-Year U.S. Treasury
Notes 7 December 1996 8,641
10-Year U.S. Treasury
Notes 18 December 1996 65,625
=====================================================================
$98,216
-----------
Federal Income Tax Information:
Gross unrealized gain for investments in
which value exceeds cost $ 993,383
Gross unrealized loss for investments in
which cost exceeds value (243,229)
=====================================================================
Net unrealized gain $ 750,154
- ---------------------------------------------------------------------
</TABLE>
/(a)/Portions of these securities are being segregated for open TBA purchases,
mortgage dollar rolls and futures.
/(b)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally + / -2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(c)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(d)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(e)/The aggregate cost for federal income tax purposes is $84,116,561.
/(f)/Each Euro Dollar contract represents $1,000,000 in notional par value. Each
5-Year U.S. Treasury Note and, 10-Year U.S. Treasury Note contract
represents $100,000 in notional par value. The total notional amount and
market value are $25,500,000 and $8,144,325, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==============================================================
<S> <C> <C> <C> <C>
Assets:
Investments in securities, at value (cost $618,544,961, $100,440,420,
$36,328,338 and $84,035,320, respectively) $617,783,125 $1O1,067,616 $36,530,762 $84,866,715
Receivables:
Investment securities sold 9,023,710 -- 2,639,947 4,512,122
Interest 6,238,391 962,570 560,207 981,011
Fund shares sold 93,534 9,761 48,407
Variation margin -- -- -- 5,475
Cash 23,482 85,863 133,870 70,206
Deferred organization expenses, net -- -- 20,748 53,352
Other assets 186,057 127,499 66,001 66,089
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 633,348,299 102,253,309 39,999,942 90,554,970
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Dividends 1,479,757 109,402 20,960 23,483
Investment securities purchased 3,134,490 -- 4,336,434 17,313,687
Fund shares repurchased 732,405 55,958 20,916 6,846
Variation margin 20,125 256 -- --
Investment adviser fees 210,539 34,534 11,033 22,677
Transfer agent fees 46,181 -- 5,254 3,058
Authorized dealer service fees 1,675 -- -- --
Accrued expenses and other liabilities 54,249 35,598 48,693 40,800
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 5,679,421 235,748 4,443,290 17,410,551
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 680,810,713 115,128,671 39,403,964 72,421,889
Accumulated undistributed (distributions in excess of) net
investment income (3,441,783) 770,624 90,133 33,551
Accumulated net realized loss on investment and futures
transactions (49,082,170) (14,541,811) (4,139,869) (240,632)
Net unrealized gain (loss) on investments and futures (617,882) 660,077 202,424 929,611
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets $627,668,878 $102,017,561 $35,556,652 $73,144,419
===================================================================================================================================
Net asset value, offering and redemption price per share
Institutional shares $9.83 $9.83 $9.96 $9.85
Administration shares $9.83 $9.85 $9.96 $9.84
Service shares -- $9.82 $9.97 $9.86
Class A shares(a) $9.83 -- -- --
===================================================================================================================================
Shares Outstanding:
Institutional shares 62,407,407 10,168,881 3,494,408 7,312,322
Administration shares 385,738 25,537 4,845 71,240
Service shares -- 185,492 69,696 38,782
Class A shares 1,091,335 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest outstanding, $.001 par value
(unlimited number of shares authorized) 63,884,480 10,379,910 3,568,949 7,422,344
===================================================================================================================================
</TABLE>
(a) Maximum public offering price per share (NAV per share x 1.0152) for Class A
shares of GS Adjustable Rate Government Fund is $9.97
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Operations
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
==========================================================
<S> <C> <C> <C> <C>
Investment income:
Interest, net (a) $39,925,070 $7,068,555 $1,979,825 $4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Total income 39,925,070 7,068,555 1,979,825 4,292,039
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 2,535,709 514,200 169,796 246,568
Distribution fees 30,905 -- -- --
Authorized dealer service fees 30,905 -- -- --
Administration share fees 9,833 107 129 751
Service share fees -- 1,222 2,322 422
Transfer agent fees 278,337 -- 16,980 24,657
Custodian fees 136,975 66,180 53,929 81,841
Professional fees 86,751 56,020 54,712 53,340
Registration fees 72,001 37,210 44,701 48,435
Amortization of deferred organization expenses 20,848 -- 22,735 24,562
Trustees' fees 1,899 1,287 760 915
Other 106,857 59,952 65,554 30,136
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,311,020 736,178 431,618 511,627
Less--Expenses reimbursable and fees waived by Goldman Sachs (417,768) (272,069) (238,097) (233,065)
- ------------------------------------------------------------------------------------------------------------------------------------
Net expenses 2,893,252 464,109 193,521 278,562
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 37,031,818 6,604,446 1,786,304 4,013,477
- ------------------------------------------------------------------------------------------------------------------------------------
Realized and unrealized gain (loss) on investment and
futures transactions:
Net realized gain (loss) from:
Investment transactions (310,326) (222,458) 367,144 (108,070)
Futures transactions (2,192,298) (345,361) (35,506) (145,350)
Net change in unrealized gain (loss) on:
Investments 6,892,986 661,003 (396,071) (192,910)
Futures 818,120 (41,385) -- 117,560
- ------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investment and futures
transactions 5,208,482 51,799 (64,433) (328,770)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $42,240,300 $ 6,656,245 $ 1,721,871 $3,684,707
====================================================================================================================================
(a) Net of $1,314 in foreign withholding tax for the Core Fixed Income Fund.
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
October 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
GS Adjustable GS Short GS Short GS Core
Rate Duration Duration Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
----------------------------------------------------------
<S> <C> <C> <C> <C>
From Operations:
Net investment income $ 37,031,818 $6,604,446 $1,786,304 $4,013,477
Net realized gain (loss) from investment and futures transactions (2,502,624) (567,819) 331,638 (253,420)
Net change in unrealized gain (loss) on investments and futures 7,711,106 619,618 (396,071) (75,350)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 42,240,300 6,656,245 1,721,871 3,684,707
- ------------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (36,233,589) (6,561,519) (1,766,892) (4,019,797)
Administration shares (220,450) (2,548) (2,032) (19,144)
Service shares -- (14,792) (17,380) (5,349)
Class A shares (577,779) -- -- --
In excess of net investment income
Institutional shares (1,304,006) -- -- --
Administration shares (7,930) -- -- --
Class A shares (20,794) -- -- --
Net realized gain (loss) on investment, and future transactions
Institutional shares -- -- -- (450,016)
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (38,364,548) (6,578,859) (1,786,304) (4,494,306)
- ------------------------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 406,586,374 42,019,441 22,248,684 21,976,567
Reinvestment of dividends and distributions 18,181,648 4,153,816 1,401,492 4,315,748
Cost of shares repurchased (477,107,914) (47,993,112) (46,918,400) (7,840,575)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from shares transactions (52,339,892) (1,819,855) (23,268,224) 18,451,740
- ------------------------------------------------------------------------------------------------------------------------------
Total (decrease) increase (48,464,140) (1,742,469) (23,332,657) 17,642,141
Net Assets:
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of year $676,133,018 $103,760,030 $58,889,309 $55,502,278
- ------------------------------------------------------------------------------------------------------------------------------
End of year $627,668,878 $102,017,561 $35,556,652 $73,144,419
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated (distributions in excess of) undistributed
net investment income $ (3,441,783) $ 770,624 $ 90,133 $ 33,551
- ------------------------------------------------------------------------------------------------------------------------------
Summary of Share Transactions:
Shares sold 41,534,978 4,293,467 2,233,482 2,244,430
Reinvestment of dividends and distributions 1,856,783 424,274 140,950 439,299
Shares repurchased (48,741,470) (4,905,357) (4,727,959) (811,075)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding (5,349,709) (187,616) (2,353,527) 1,872,654
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
32
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GS Adjustable GS Short-Term
Rate Government
Government Agency
Agency Fund Fund
==================================
<S> <C> <C>
From Operations:
Net investment income $ 42,586,453 $ 8,885,667
Net realized gain (loss) from investment and futures transactions (12,000,479) (4,030,174)
Net change in unrealized gain on investments and futures 16,138,367 5,735,691
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 46,724,341 10,591,184
- ----------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (42,629,917) (8,684,213)
Administration shares (278,448) (11,164)
Service shares -- --
Class A shares (425,863) --
In excess of net investment income
Institutional shares (2,124,188) --
Administration shares (13,875) --
Class A shares (21,220) --
- ----------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (45,493,511) (8,695,377)
- ----------------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 456,762,969 49,034,023
Proceeds from reorganizations 37,593,780 --
Reinvestment of dividends and distributions 21,273,685 4,993,443
Cost of shares repurchased (790,211,526) (145,988,674)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (274,581,092) (91,961,208)
- ----------------------------------------------------------------------------------------------------------------
Total (decrease) increase (273,350,262) (90,065,401)
Net Assets:
Beginning of year 949,483,280 193,825,431
- ----------------------------------------------------------------------------------------------------------------
End of year $676,133,018 $103,760,030
================================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ (2,129,902) $ 708,450
================================================================================================================
Summary of Share Transactions:
Shares sold 46,809,171 5,072,030
Shares exchanged in reorganizations 3,843,169 --
Reinvestment of dividends and distributions 2,181,117 516,178
Shares repurchased (81,125,615) (15,135,663)
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (28,292,158) (9,547,455)
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
GS Short GS Core
Duration Fixed
Tax-Free Income
Fund Fund
============================
<S> <C> <C>
From Operations:
Net investment income $ 2,814,454 $2,248,195
Net realized gain (loss) from investment and futures transactions (472,312) 921,130
Net change in unrealized gain on investments and futures 1,270,197 1,663,176
- ---------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 3,612,339 4,832,501
- ---------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
Net investment income
Institutional shares (2,771,793) (2,253,625)
Administration shares (20,584) --
Service shares (22,077) --
Class A shares -- --
In excess of net investment income
Institutional shares -- --
Administration shares -- --
Class A shares -- --
- ---------------------------------------------------------------------------------------------------------
Total distributions to shareholders (2,814,454) (2,253,625)
- ---------------------------------------------------------------------------------------------------------
From Share Transactions:
Net proceeds from sales of shares 36,468,900 30,256,879
Proceeds from reorganizations -- --
Reinvestment of dividends and distributions 1,873,154 2,232,160
Cost of shares repurchased (67,865,169) (4,073,379)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in net assets resulting from share
transactions (29,523,115) 28,415,660
- ---------------------------------------------------------------------------------------------------------
Total (decrease) increase (28,725,230) 30,994,536
Net Assets:
Beginning of year 87,614,539 24,507,742
- ---------------------------------------------------------------------------------------------------------
End of year $58,889,309 $55,502,278
=========================================================================================================
Accumulated (distributions in excess of) undistributed net investment
income $ 67,398 $ 40,202
=========================================================================================================
Summary of Share Transactions:
Shares sold 3,733,382 3,077,397
Shares exchanged in reorganizations -- --
Reinvestment of dividends and distributions 190,942 230,595
Shares repurchased (6,950,294) (411,156)
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in shares outstanding (3,025,970) 2,896,836
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial
statements.
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust
registered under the Investment Company Act of 1940 (as amended) as an open-end,
management investment company. Included in this report are the financial
statements for the GS Adjustable Rate Government Fund, GS Short Duration
Government Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund,
collectively, ("the Funds"). The Funds are diversified portfolios of the Trust
offering three classes of shares - Institutional shares, Administration shares
and Service shares. In addition, the GS Adjustable Rate Government Fund offers
Class A shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that may affect the reported amounts.
A. Investment Valuation
-------------------------
Investments in mortgage backed, asset backed and U.S. Treasury obligations
for which accurate market quotations are readily available are valued on the
basis of quotations furnished by a pricing service or provided by dealers in
such securities. Other securities are valued based on yield equivalents, a
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Portfolio securities for which accurate market
quotations are not readily available are valued based on yield equivalents,
pricing matrix or other sources, under valuation procedures established by the
Trust's Board of Trustees. Short-term debt obligations maturing in sixty days or
less are valued at amortized cost.
B. Security Transactions and Investment Income
------------------------------------------------
Security transactions are recorded on trade date. Realized gains and
losses on sales of portfolio securities are calculated on the identified cost
basis. Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account actual principal
prepayment experience and estimates of future principal prepayments. Certain
mortgage security paydown gains and losses are taxable as ordinary income. Such
paydown gains and losses increase or decrease taxable ordinary income available
for distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
Market premiums resulting from the purchase of long-term debt securities are
amortized to interest income over the life of the security with a corresponding
decrease in the cost basis of that security for GS Short Duration Tax-Free Fund.
Market discounts and market premiums on debt securities, other than mortgage
backed securities, are amortized to interest income over the life of the
security with a corresponding adjustment in the cost basis of that security for
GS Core Fixed Income Fund.
C. Mortgage Dollar Rolls
--------------------------
The Funds, with the exception of the GS Short Duration Tax-Free Fund, may
enter into mortgage "dollar rolls" in which the Fund sells securities in the
current month for delivery and simultaneously contracts with the same
counterparty to repurchase similar (same type,
34
<PAGE>
coupon and maturity) but not identical securities on a specified future date.
The Fund loses the right to receive principal and interest paid on the
securities sold. However, the Fund benefits to the extent of any price received
for the securities sold and the lower forward price for the future purchase
(often referred to as the "drop") or fee income plus the interest earned on the
cash proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high-grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
D. Futures Contracts
----------------------
The Funds may enter into futures transactions in order to hedge against
changes in interest rates, securities prices, currency exchange rates in the
case of GS Core Fixed Income Fund or to seek to increase total return. A Fund
will engage in futures transactions only for bona fide hedging purposes as
defined in regulations of the CFTC or to seek to increase total return to the
extent permitted by such regulations. The use of futures contracts involve, to
varying degrees, elements of market risk which may exceed the amounts recognized
in the Statements of Assets and Liabilities.
Upon entering into a futures contract, a Fund is required to deposit with
a broker an amount of cash or securities equal to the minimum "initial margin"
requirement of the futures exchange on which the contract is traded. Subsequent
payments ("variation margin") are made or received by the Fund each day,
dependent on the daily fluctuations in the value of the contract, and are
recorded for financial reporting purposes as unrealized gains or losses by the
Fund. When entering into a closing transaction, the Fund will realize, for book
purposes, a gain or loss equal to the difference between the value of the
futures contract to sell and the futures contract to buy. Futures contracts are
valued at the most recent settlement price, unless such price does not reflect
the fair market value of the contract, in which case the position will be valued
using methods as approved by the Board of Trustees.
Certain risks may arise upon entering into futures contracts. The
predominant risk is that the changes in the value of the futures contract may
not directly correlate with changes in the value of the underlying securities.
This risk may decrease the effectiveness of the Funds' hedging strategies and
may also result in a loss to the Funds.
E. Deferred Organization Expenses
-----------------------------------
Organization-related costs are being amortized on a straight-line basis
over a period of five years.
F. Expenses
-------------
Expenses incurred by the Trust that do not specifically relate to an
individual portfolio of the Trust are allocated to the portfolios based on each
portfolio's relative average net assets for the period.
Shareholders of Administration shares and Service shares bear all expenses
and fees paid to service organizations for their services with respect to such
shares as well as other expenses (subject to expense limitations) which are
directly attributable to such shares. For the GS Adjustable Rate Government
Fund, shareholders of Class A shares bear all expenses and fees relating to the
distribution and authorized dealer service plans as well as other expenses which
are directly attributable to such shares.
G. Federal Taxes
------------------
It is each Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute each
year substantially all of its investment company taxable and tax-exempt income
to its shareholders. Accordingly, no federal tax provisions are required.
35
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The characterization of distributions to shareholders for financial
statement purposes as either from or in excess of net investment income or net
realized gain on investment transactions, or from capital, depends on the type
of book/tax differences that may exist as well as timing differences associated
with having different book and tax year ends.
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. federal tax purposes:
<TABLE>
<CAPTION>
Years of
Fund Amount Expiration
- --------------------------------------- --------------------- -----------------
<S> <C> <C>
GS Adjustable Rate
Government Fund $47,923,000 2000-2003
GS Short Duration Government
Fund $13,272,000 2002-2003
GS Short Duration Tax-Free
Fund $4,271,000 2002-2003
GS Core Fixed Income
Fund $77,000 2004
</TABLE>
These amounts are available to be carried forward to offset future capital
gains to the extent permitted by applicable laws or regulations.
3. Agreements
Goldman Sachs Funds Management, L.P. ("GSFM"), an affiliate of Goldman,
Sachs & Co. ("Goldman Sachs"), serves as the investment adviser for the GS
Adjustable Rate Government and GS Short Duration Government Funds pursuant to
Investment Advisory Agreements. Goldman Sachs Asset Management ("GSAM"), a
separate operating division of Goldman Sachs, serves as the investment adviser
for the GS Short Duration Tax-Free and GS Core Fixed Income Funds pursuant to
Investment Advisory Agreements. Under the Investment Advisory Agreements, the
adviser, subject to the general supervision of the Trust's Board of Trustees,
manages the Funds' portfolios and provides for the administration of the Funds'
other affairs. As compensation for the services rendered under the Investment
Advisory Agreements and the assumption of the expenses related thereto, the
adviser is entitled to a fee, computed daily and payable monthly at an annual
rate equal to .40% of average daily net assets of GS Adjustable Rate Government,
GS Short Duration Tax-Free and GS Core Fixed Income Funds and .50% of average
daily net assets of GS Short Duration Government Fund. Until further notice,
GSFM has voluntarily agreed not to impose .10% of its investment advisory fee
for the GS Short Duration Government Fund. For the year ended October 31, 1996,
investment advisory fees of approximately $103,000 were waived for the GS Short
Duration Government Fund.
The adviser has voluntarily agreed to limit certain of the Funds' expenses
(excluding investment advisory fees, taxes, interest, brokerage, litigation,
administrative and service share fees, indemnification and other extraordinary
expenses and with respect to GS Adjustable Rate Government Class A shares,
distribution and authorized dealer service fees) to the extent that such
expenses exceed .05% per annum of each Fund's average daily net assets. For the
year ended October 31, 1996, the amount of reimbursed expenses for the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and GS Core Fixed Income Funds were approximately $387,000, $169,000,
$238,000 and $233,000, respectively. The amounts reimbursable to the GS
Adjustable Rate Government, GS Short Duration Government, GS Short Duration
Tax-Free and the GS Core Fixed Income Funds at October 31, 1996 were
approximately $29,000, $12,000, $31,000 and $19,000, respectively, and are
included in "Other assets" in the accompanying Statements of Assets and
Liabilities.
Goldman Sachs serves as Distributor of the shares of the Funds pursuant to
a Distribution Agreement and receives no compensation in this capacity with the
exception of GS Adjustable Rate Government Fund Class A shares. At October 31,
1996, Goldman Sachs retained approximately $79,000 of sales load related to
Class A shares. Goldman Sachs also serves as Transfer Agent of the Funds for a
fee.
- --------------------------------------------------------------------------------
36
<PAGE>
- --------------------------------------------------------------------------------
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 for the Class A
shares. Under the Plan, Goldman Sachs is entitled to receive a quarterly
distribution fee equal, on an annual basis, to .25% of the average daily net
assets of Class A shares. Currently, Goldman Sachs has agreed to voluntarily
waive this distribution fee. Distribution fees waived for the period amounted to
approximately $31,000.
The Trust, on behalf of the GS Adjustable Rate Government Fund, has
adopted a non-Rule 12b-1 Authorized Dealer Service Plan (the "Service Plan")
pursuant to which Goldman Sachs and Authorized Dealers are compensated for
providing personal and account maintenance services. GS Adjustable Rate
Government Fund pays a fee under the Service Plan equal, on an annual basis, to
.25% of its average daily net assets attributable to Class A shares.
For the year ended October 31, 1996, GS Adjustable Rate Government Fund,
GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS Core
Fixed Income Fund incurred commission expenses of approximately $108,000,
$24,000, $1,000 and $4,000, respectively, in connection with futures contracts
entered into with Goldman Sachs. At October 31, 1996, GS Adjustable Rate
Government Fund had approximately $20,000, payable to Goldman Sachs related to
variation margin on futures contracts. Approximately $5,000 relating to
variation margin was due to the GS Core Fixed Income Fund from Goldman Sachs.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving
line of credit facility to be used solely for temporary or emergency purposes.
Under the most restrictive arrangement, each fund must own securities having a
market value in excess of 300% of the total bank borrowings. The interest rate
on the borrowings is based on the federal funds rate. During the year ended
October 31, 1996, the Funds did not have any borrowings under this facility.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for
the year ended October 31, 1996, were as follows:
================================================================================
GS GS GS
Adjustable Short Short GS
Rate Duration Duration Core Fixed
Government Government Tax-Free Income
Fund Fund Fund Fund
- --------------------------------------------------------------------------------
Purchases of U.S.
Government and
agency obligations $319,204,368 $117,205,724 -- $227,149,602
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) -- -- $101,504,852 41,015,852
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 370,448,093 113,784,637 -- 251,512,185
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) -- -- 128,041,004 19,684,141
- --------------------------------------------------------------------------------
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
Fund Dollars Shares
- --------------------------------------------------------------------------------
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $391,363,204 39,981,299
Reinvestment of dividends and
distributions 17,432,484 1,780,288
Shares repurchased (456,776,795) (46,666,343)
----------------------------------------
(47,981,107) (4,904,756)
----------------------------------------
Administration Shares:
Shares sold 1,457,872 148,981
Reinvestment of dividends and
distributions 94,420 9,641
Shares repurchased (1,356,764) (138,609)
----------------------------------------
195,528 20,013
----------------------------------------
37
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund: Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Shares:
Shares sold $ 13,765,298 1,404,698
Reinvestment of dividends and distributions 654,744 66,854
Shares repurchased (18,974,355) (1,936,518)
-------------------------------------
(4,554,313) (464,966)
-------------------------------------
Total $ (52,339,892) (5,349,709)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 39,855,638 4,072,082
Reinvestment of dividends and distributions 4,137,041 422,559
Shares repurchased (47,875,174) (4,893,286)
-------------------------------------
(3,882,495) (398,645)
-------------------------------------
Administration Shares:
Shares sold 326,101 33,251
Reinvestment of dividends and distributions 2,032 207
Shares repurchased (77,312) (7,921)
-------------------------------------
250,821 25,537
-------------------------------------
Service Shares:
Shares sold 1,837,702 188,134
Reinvestment of dividends and distributions 14,743 1,508
Shares repurchased (40,626) (4,150)
-------------------------------------
1,811,819 185,492
-------------------------------------
Total $ (1,819,855) (187,616)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 20,777,050 2,085,253
Reinvestment of dividends and distributions 1,383,351 139,126
Shares repurchased (45,664,878) (4,601,865)
-------------------------------------
(23,504,477) (2,377,486)
-------------------------------------
Administration Shares:
Shares sold 105,302 10,672
Reinvestment of dividends and distributions 2,017 203
Shares repurchased (105,478) (10,644)
-------------------------------------
1,841 231
-------------------------------------
Service Shares:
Shares sold $ 1,366,332 137,557
Reinvestment of dividends and distributions 16,124 1,621
Shares repurchased (1,148,044) (115,450)
-------------------------------------
234,412 23,728
-------------------------------------
Total $ (23,268,224) (2,353,527)
=====================================
GS Core Fixed Income Fund
Institutional Shares:
Shares sold $ 20,524,422 2,094,833
Reinvestment of dividends and distributions 4,292,533 436,903
Shares repurchased (7,431,360) (769,104)
-------------------------------------
17,385,595 1,762,632
-------------------------------------
Administration Shares:
Shares sold 1,029,912 106,074
Reinvestment of dividends and distributions 17,883 1,847
Shares repurchased (358,284) (36,681)
-------------------------------------
689,511 71,240
-------------------------------------
Service Shares:
Shares sold 422,233 43,525
Reinvestment of dividends and distributions 5,332 549
Shares repurchased (50,931) (5,292)
-------------------------------------
376,634 38,782
-------------------------------------
Total $ 18,451,740 1,872,654
=====================================
</TABLE>
- --------------------------------------------------------------------------------
Share activity for the year ended October 31, 1995 is as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
GS Adjustable Rate Government Fund
Institutional Shares:
Shares sold $ 445,293,934 45,635,666
Shares exchanged in reorganization 18,823,725 1,926,438
Reinvestment of dividends and distributions 20,730,137 2,125,494
Shares repurchased (771,265,543) (79,186,935)
-------------------------------------
(286,417,747) (29,499,337)
-------------------------------------
Administration Shares:
Shares sold 648,042 66,628
Shares exchanged in reorganization 1,561,584 159,814
Reinvestment of dividends and distributions 124,368 12,743
Shares repurchased (5,731,937) (588,307)
-------------------------------------
(3,397,943) (349,122)
-------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Fund Dollars Shares
============================================================================================
<S> <C> <C>
Class A Shares:
Shares sold 10,820,993 1,106,877
Shares exchanged in reorganization 17,208,471 1,756,917
Reinvestment of dividends and distributions 419,180 42,880
Shares repurchased (13,214,046) (1,350,373)
-------------------------------------
15,234,598 1,556,301
-------------------------------------
Total $(274,581,092) (28,292,158)
=====================================
GS Short Duration Government Fund
Institutional Shares:
Shares sold $ 49,032,419 5,071,865
Reinvestment of dividends and distributions 4,993,225 516,155
Shares repurchased (145,260,300) (15,059,774)
-------------------------------------
(91,234,656) (9,471,754)
-------------------------------------
Administration Shares:
Shares sold 1,604 165
Reinvestment of dividends and distributions 218 23
Shares repurchased (728,374) (75,889)
-------------------------------------
(726,552) (75,701)
-------------------------------------
Total $ (91,961,208) (9,547,455)
=====================================
GS Short Duration Tax-Free Fund
Institutional Shares:
Shares sold $ 18,780,011 1,920,432
Reinvestment of dividends and distributions 1,860,104 189,624
Shares repurchased (46,762,899) (4,787,105)
-------------------------------------
(26,122,784) (2,677,049)
-------------------------------------
Administration Shares:
Shares sold -- --
Reinvestment of dividends and distributions 2,483 246
Shares repurchased (3,800,930) (390,639)
-------------------------------------
(3,798,447) (390,393)
-------------------------------------
Service Shares:
Shares sold 17,688,889 1,812,950
Reinvestment of dividends and distributions 10,567 1,072
Shares repurchased (17,301,340) (1,772,550)
-------------------------------------
398,116 41,472
-------------------------------------
Total $(29,523,115) (3,025,970)
=====================================
</TABLE>
7. Repurchase Agreements
- --------------------------------------------------------------------------------
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Fund's custodian, or at subcustodians. GSFM and GSAM
monitor the market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
The Funds, together with other registered investment companies having
advisory agreements with GSFM and GSAM or their affiliates, transfer uninvested
cash balances into a joint account, the daily aggregate balance of which is
invested in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, the GS Adjustable Rate Government, GS Short Duration
Government and GS Core Fixed Income Funds had an .49%, .04% and .52%,
respectively, undivided interest in the repurchase agreements in the following
joint account which equaled $13,000,000, $1,000,000 and $13,900,000,
respectively, in principal amount.
- --------------------------------------------------------------------------------
39
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
As of October 31, 1996, the repurchase agreement in the joint account along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,290,445, 5.5%--8.50%, 2.1.09-6/1/26; FHLMC: $165,859,789, 5.50%--8.50%,
9/1/98--8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (U.S. Treasury
Notes: $942,903,967, 4.38%--8.50%, 11/15/96--8/15/03)
924,700,000 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,600,142, 5.50%--8.00%, 2/1/02-10/1/26; FHLMC:
$464,523,981, 6.00%--9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S. Treasury
Interest Only Stripped Securities: $11,653,277, 2/15/98--5/15/02; U.S. Treasury
Notes: $85,997,728, 5.25%--7.75%, 5/15/97-10/15/06; U.S. Treasury Principal
Only Stripped Securities: $33,993,571, 5/15/97--5/15/05; U.S. Treasury Bills:
$41,756,285, 12/12/96--3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price
$175,026,979
(Treasury Notes: $178,528,739, 6.88%--7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- --------------------------------------------------------------------------------
Total Joint Repurchase Agreement $2,669,700,000
================================================================================
</TABLE>
9. Administration and Service Plans
The Funds have adopted Administration and Service Plans. These plans allow
for Administration shares and Service shares, respectively, to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration and Service Plans provide for compensation to
the service organizations in an amount up to .25% and .50% (on an annualized
basis), respectively, of the average daily net asset value of the respective
shares.
10. Other Matters
On April 28, 1995, the GS Adjustable Rate Government Fund acquired the
assets of GS Government Agency Portfolio (For Financial Institutions) in
exchange solely for (i) the issuance of Institutional shares and Administration
shares of beneficial interest of the GS Adjustable Rate Government Fund and
(ii) the assumption by GS Adjustable Rate Government Fund of the liabilities of
GS Government Agency Portfolio (For Financial Institutions). Following this
transfer, GS Government Agency Portfolio (For Financial Institutions) was
liquidated and GS Adjustable Rate Government Fund's Institutional and
Administration shares were distributed to the former shareholders of GS
Government Agency Portfolio (For Financial Institutions).
The Reorganization was accomplished by a tax-free transfer of assets whereby
each shareholder of GS Government Agency Portfolio (For Financial Institutions)
received a number of full and fractional shares of GS Adjustable Rate Government
Fund having a total net asset value of their shares of GS Government Agency
Portfolio (For Financial Institutions) held on April 28, 1995. The net assets,
including $370,489 of unrealized depreciation for the GS Government Agency
Portfolio (For Financial Institutions), net asset values per share and shares
outstanding as of April 28, 1995 were:
================================================================================
GS Government
Agency
Portfolio
(For Financial GS Adjustable GS Adjustable
Institutions Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
Net Assets $20,385,309 $673,292,455 $693,677,764
Shares Outstanding
Institutional Shares 1,912,506 68,506,367 70,432,805
Administration Shares 158,661 401,122 560,936
Net Asset Value Per Share
Institutional Shares 9.84 9.77 9.77
Administration Shares 9.84 9.77 9.77
================================================================================
On May 11, 1995, shareholders of the GS Adjustable Rate Mortgage Fund
approved a Plan of Reorganization (the Plan) which was completed on May 12,
1995. Under the Plan, GS Adjustable Rate Mortgage Fund was reorganized as a
separate class (Class A) of the GS
- --------------------------------------------------------------------------------
40
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Adjustable Rate Government Fund. GS Adjustable Rate Mortgage Fund's assets were
acquired by GS Adjustable Rate Government Fund in exchange solely for (i) the
issuance of Class A shares of beneficial interest of GS Adjustable Rate
Government Fund and (ii) the assumption by GS Adjustable Rate Government Fund of
the liabilities of GS Adjustable Rate Mortgage Fund. Following this transfer, GS
Adjustable Rate Mortgage Fund was liquidated and GS Adjustable Rate Government
Fund Class A shares were distributed to the former shareholders of GS Adjustable
Rate Mortgage Fund.
The Reorganization was accomplished by a tax-free transfer of assets
whereby each shareholder of GS Adjustable Rate Mortgage Fund received a number
of Class A full and fractional shares of GS Adjustable Rate Government Fund
having a total net asset value of their shares of GS Adjustable Rate Mortgage
Fund held as of May 12, 1995. The net assets, including $45,684 of net
unrealized depreciation for the GS Adjustable Rate Mortgage Fund, net asset
values per share and shares outstanding as of May 12, 1995 were:
================================================================================
<TABLE>
<CAPTION>
GS Adjustable
Rate Mortgage GS Adjustable GS Adjustable
Fund Rate Government Rate Government
(Pre- Fund (Pre- Fund (Post-
Reorganization) Reorganization) Reorganization)
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Assets $17,208,471 $727,300,372 $744,508,843
Shares Outstanding
Institutional Shares -- 73,743,084 73,743,084
Administration Shares -- 561,352 561,352
Class A Shares 3,552,167 -- 1,756,917
Net Asset Value Per Share
Institutions Shares -- 9.79 9.79
Administration Shares -- 9.79 9.79
Class A Shares 4.84 -- 9.79
</TABLE>
================================================================================
The total amount of capital loss carryforward brought on to the books of
the GS Adjustable Rate Government Fund due to these reorganization was
approximately $3,154,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing
and Retirement Income Plan was beneficial owner of approximately 29% of the
outstanding shares of the GS Short Duration Government Fund.
11. Certain Reclassifications
In accordance with Statement of Position 93-2, the GS Adjustable Rate
Government Fund, GS Short Duration Tax-Free Fund, and GS Core Fixed Income Fund
have reclassified $20,849, $36,587, $22,735, and $24,162, respectively, from
paid-in capital to accumulated undistributed net investment income. These
reclassifications have no impact on the net asset value of the Fund and are
designed to present the Fund's capital accounts on a tax basis.
- --------------------------------------------------------------------------------
41
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
=================================================================== ============================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option of net
beginning investment futures related investment investment and futures investment
of period income transactions transactions operations income transactions income
================================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ $9.77 $0.5759(a) $0.0772(a) -- $0.6531 $ (0.5725) -- $ (0.0206)
1996-Administration
Shares............ 9.77 0.5489(a) 0.0797(a) -- 0.6286 (0.5489) -- (0.0198)
1996-Class A
Shares............ 9.77 0.5481(a) 0.0806(a) -- 0.6287 (0.5489) -- (0.0198)
1995-Institutional
Shares............ 9.74 0.5630(a) 0.0717(a) -- 0.6347 (0.5759) -- (0.0287)
1995-Administration
Shares............ 9.74 0.5366(a) 0.0737(a) -- 0.6103 (0.5528) -- (0.0275)
1995-Class A
Shares(c)......... 9.79 0.2721(a) (0.0090)(a) -- 0.2631 (0.2697) -- (0.0134)
1994-Institutional
Shares............ 10.00 0.4341(a) (0.2455)(a) -- 0.1886 (0.4486) -- --
1994-Administration
Shares............ 10.00 0.4211(a) (0.2572)(a) -- 0.1639 (0.4239) -- --
1993-Institutional
Shares............ 10.04 0.4397 (0.0376)(d) -- 0.4021 (0.4397) -- (0.0024)
1993-Administration
Shares(e)......... 10.02 0.2146 (0.0173)(d) -- 0.1973 (0.2146) -- (0.0027)
1992-Institutional
Shares............ 10.03 0.5599 (0.0029)(d) -- 0.5570 (0.5470) -- --
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 10.00 0.1531 0.0322(d) -- 0.1853 (0.1553) -- --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
=========================================
In excess of
net realized Net
gain on increase Ratio of
investment, From Total (decrease) Net asset net
option and paid distributions in net value at expenses
futures in to asset end of Total to average
transactions capital shareholders value period return(k) net assets
==============================================================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ -- -- $(0.5931) $0.0600 $9.83 6.86% 0.45%
1996-Administration
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1996-Class A
Shares............ -- -- (0.5687) 0.0600 9.83 6.60 0.70
1995-Institutional
Shares............ -- -- (0.6046) 0.0301 9.77 6.75 0.46
1995-Administration
Shares............ -- -- (0.5803) 0.0300 9.77 6.48 0.71
1995-Class A
Shares(c)......... -- -- (0.2831) (0.0200) 9.77 2.74(f) 0.69(b)
1994-Institutional
Shares............ -- -- (0.4486) (0.2600) 9.74 1.88 0.46
1994-Administration
Shares............ -- -- (0.4239) (0.2600) 9.74 1.63 0.71
1993-Institutional
Shares............ -- -- (0.4421) (0.0400) 10.00 4.13 0.45
1993-Administration
Shares(e)......... -- -- (0.2173) (0.0200) 10.00 2.01(f) 0.70(b)
1992-Institutional
Shares............ -- -- (0.5470) 0.0100 10.04 6.12 0.42
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ -- -- (0.1553) 0.0300 10.03 2.14(f) 0.20(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
=============================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
========================================================================
GS ADJUSTABLE RATE GOVERNMENT FUND
------------------------------------------------------------------------
For the Year Ended October 31,
=======================================
<S> <C> <C> <C> <C> <C>
1996-Institutional
Shares............ 5.85% 52.36% $613,149 0.51% 5.79%
1996-Administration
Shares............ 5.59 52.36 3,792 0.76 5.53
1996-Class A
Shares............ 5.59 52.36 10,728 1.01 5.28
1995-Institutional
Shares............ 5.77 24.12 657,358 0.53 5.70
1995-Administration
Shares............ 5.50 24.12 3,572 0.78 5.43
1995-Class A
Shares(c)......... 5.87(b) 24.12 15,203 1.01(b) 5.55(b)
1994-Institutional
Shares............ 4.38 37.81 942,523 0.49 4.35
1994-Administration
Shares............ 4.27 37.81 6,960 0.74 4.24
1993-Institutional
Shares............ 4.36 103.74 2,760,871 0.48 4.33
1993-Administration
Shares(e)......... 3.81(b) 103.74 5,326 0.73(b) 3.78(b)
1992-Institutional
Shares............ 5.61 286.40 2,145,064 0.55 5.48
For the Period July 17, 1991(g) through October 31,
===================================================
1991-Institutional
Shares............ 7.31(b) 145.67(b) 239,642 1.02(b) 6.49(b)
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations Distributions to shareholders
---------------------------------------------------------- ----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-------------------------------------------------------------------------------------------------------------------
GS SHORT DURATION GOVERNMENT FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
- -------------------------------------------------------
1996-Institutional
Shares ........... $9.82 $0.6290/(a)/ $0.0136/(a)/ -- $0.6426 $(0.6326) --
1996-Administration
Shares/(h)/ ...... 9.86 0.3837/(a)/ 0.0003/(a)/ -- 0.3840 (0.3940) --
1996-Service
Shares/(i)/ ...... 9.72 0.3134/(a)/ 0.1018/(a)/ -- 0.4152 (0.3152) --
1995-Institutional
Shares ........... 9.64 0.6652/(a)/ 0.1666/(a)/ -- 0.8318 (0.6518) --
1995-Administration
Shares ........... 9.64 0.2384/(a)/ (0.0433)/(a)/ -- 0.1951 (0.2051) --
1994-Institutional
Shares ........... 10.14 0.5628/(a)/ (0.4592)/(a)/ -- 0.1036 (0.5598) (0.0438)
1994-Administration
Shares ........... 10.14 0.5329/(a)/ (0.4539)/(a)/ -- 0.0790 (0.5352) (0.0438)
1993-Institutional
Shares ........... 10.16 0.5627 (0.0135)/(d)/ -- 0.5492 (0.5627) --
1993-Administration
Shares/(e)/ ...... 10.23 0.2725 (0.0900)/(d)/ -- 0.1825 (0.2725) --
1992-Institutional
Shares ........... 10.22 0.6703 (0.0600)/(d) -- 0.6103 (0.6703) --
1991-Institutional
Shares ........... 10.00 0.8020 0.2200/(d)/ -- 1.0220 (0.8020) --
1990-Institutional
Shares ........... 10.07 0.8300 (0.0700)/(d) -- 0.7600 (0.8300) --
1989-Institutional
Shares ........... 10.10 0.8800 -- -- 0.8800 (0.8800) --
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ........... 10.00 0.1800 0.1000/(d)/ -- 0.2800 (0.1800) --
<CAPTION>
In excess of
net realized Net
gain on increase
In excess investment, From Total (decrease) Net asset
of net option and paid distributions in net value at
investment futures in to asset end of
income transactions capital shareholders value period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the Year Ended October 31,
1996-Institutional
Shares ............ -- -- -- $(0.6326) $0.0100 $9.83
1996-Administration
Shares/(h)/ ....... -- -- -- (0.3940) (0.0100) 9.85
1996-Service
Shares/(i)/ ....... -- -- -- (0.3152) 0.1000 9.82
1995-Institutional
Shares ............ -- -- -- (0.6518) 0.1800 9.82
1995-Administration
Shares ............ -- -- -- (0.2051) (0.0100) 9.63/(h)/
1994-Institutional
Shares ............ -- -- -- (0.6036) (0.5000) 9.64
1994-Administration
Shares ............ -- -- -- (0.5790) (0.5000) 9.64
1993-Institutional
Shares ............ (0.0065) -- -- (0.5692) (0.0200) 10.14
1993-Administration
Shares/(e)/ ....... -- -- -- (0.2725) (0.9000) 10.14
1992-Institutional
Shares ............ -- -- -- (0.6703) (0.0600) 10.16
1991-Institutional
Shares ............ -- -- -- (0.8020) 0.2200 10.22
1990-Institutional
Shares ............ -- -- -- (0.8300) (0.0700) 10.00
1989-Institutional
Shares ............ -- -- (0.0300) (0.9100) (0.0300) 10.07
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ -- -- -- (0.1800) 0.1000 10.10
<CAPTION>
Ratios assuming
not voluntary waiver
of fees or
expense limitations
--------------------------
Ratio of Ratio of
net Net net
Ratio of investment assets investment
net income at end Ratio of income
expenses (loss) Portfolio of expenses (loss)
Total to average to average turnover period to average to average
return/(k)/ net assets net assets rate/(d)/ (in 000s) net assets net assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
1996-Institutional
Shares ............ 6.75% 0.45% 6.44% 115.45% $99,944 0.71% 6.18%
1996-Administration
Shares/(h)/ ....... 4.00/(f)/ 0.70%/(b)/ 5.97/(b)/ 115.45 252 0.96/(b)/ 5.71/(b)/
1996-Service
Shares/(i)/ ....... 4.35/(f)/ 0.95/(b)/ 6.05/(b) 115.45 1,822 1.21/(b)/ 5.79/(b)/
1995-Institutional
Shares ............ 8.97 0.45 6.87 292.56 103,760 0.72 6.60
1995-Administration
Shares ............ 2.10 0.70/(b)/ 7.91/(b)/ 292.56 -- 0.90/(b)/ 7.71/(b)/
1994-Institutional
Shares ............ 0.99 0.45 5.69 289.79 193,095 0.59 5.55
1994-Administration
Shares ............ 0.73 0.70 5.38 289.79 730 0.84 5.24
1993-Institutional
Shares ............ 5.55 0.45 5.46 411.66 359,708 0.64 5.31
1993-Administration
Shares/(e)/ ....... 1.74 0.70/(b)/ 4.84/(b)/ 411.66 16,490 0.80/(b)/ 4.74/(b)/
1992-Institutional
Shares ............ 6.24 0.45 6.60 216.07 277,927 0.69 6.36
1991-Institutional
Shares ............ 10.93 0.45 8.25 155.44 158,948 0.79 7.91
1990-Institutional
Shares ............ 8.23 0.45 8.62 173.21 68,995 0.95 8.12
1989-Institutional
Shares ............ 9.03 0.46 8.71 137.37 31,015 1.39 7.78
For the Period August 15, 1988/(g)/ through October 31,
- -------------------------------------------------------
1988-Institutional
Shares ............ 3.30/(f)/ 0.55/(b)/ 8.55/(b)/ 167.00/(b)/ 39,052 1.42/(b)/ 7.68/(b)/
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
================================================ ===================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
===============================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $9.94 $0.4192/(a)/ $0.0200/(a)/ -- $0.4392 $(0.4192) --
1996-Administration Shares.......... 9.94 0.3944/(a)/ 0.0200/(a)/ -- 0.4144 (0.3944) --
1996-Service Shares................. 9.95 0.3697/(a)/ 0.0200/(a)/ -- 0.3897 (0.3697) --
1995-Institutional Shares........... 9.79 0.4235/(a)/ 0.1500/(a)/ -- 0.5735 (0.4235) --
1995-Administration Shares.......... 9.79 0.3989/(a)/ 0.1500/(a)/ -- 0.5489 (0.3989) --
1995-Service Shares................. 9.79 0.3744/(a)/ 0.1600/(a)/ -- 0.5344 (0.3744) --
1994-Institutional Shares........... 10.23 0.3787/(a)/ (0.3575)/(a)/ -- 0.0212 (0.3787) (0.0825)
1994-Administration Shares.......... 10.23 0.3537/(a)/ (0.3575)/(a)/ -- (0.0038) (0.3537) (0.0825)
1994-Service Shares/(j)/............ 9.86 0.0475/(a)/ (0.0700)/(a)/ -- (0.0225) (0.0475) --
1993-Institutional Shares........... 9.93 0.3834 0.3000/(d)/ -- 0.6834 (0.3834) --
1993-Administration Shares/(j)/..... 10.16 0.1555 0.0720/(d)/ -- 0.2275 (0.1555) --
For the Period October 1, 1992/(g)/ through October 31,
- ----------------------------------------------------
1992-Institutional Shares........... 10.00 0.0341 (0.0700)/(d)/ -- (0.0359) (0.0341) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
==================================
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return/(k)/ net assets
==================================================================================================
GS SHORT DURATION TAX-FREE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
====================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.4192) $0.0300 $9.96 4.50% 0.45%
1996-Administration Shares.......... -- -- -- (0.3944) 0.0300 9.96 4.24 0.70
1996-Service Shares................. -- -- -- (0.3697) 0.0200 9.97 3.98 0.95
1995-Institutional Shares........... -- -- -- (0.4235) 0.1500 9.94 5.98 0.45
1995-Administration Shares.......... -- -- -- (0.3989) 0.1500 9.94 5.76 0.70
1995-Service Shares................. -- -- -- (0.3744) 0.1600 9.95 5.59 0.95
1994-Institutional Shares........... -- -- -- (0.4612) (0.4400) 9.79 0.17 0.45
1994-Administration Shares.......... -- -- -- (0.4362) (0.4400) 9.79 (0.11) 0.70
1994-Service Shares/(j)/............ -- -- -- (0.0475) (0.0700) 9.79 (0.32)/(f)/ 0.95/(b)/
1993-Institutional Shares........... -- -- -- (0.3834) 0.3000 10.23 7.03 0.41
1993-Administration Shares/(j)/..... -- -- -- (0.1555) 0.0720 10.23 2.28/(f)/ 0.70/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... -- -- -- (0.0341) (0.0700) 9.93 (0.34)/(f)/ 0.05/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
==================================
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate/(d)/ (in 000s) net assets net assets
==========================================================
GS SHORT DURATION TAX-FREE FUND
- --------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 4.21% 231.65% $34,814 1.01% 3.65%
1996-Administration Shares.......... 3.96 231.65 48 1.26 3.40
1996-Service Shares................. 3.74 231.65 695 1.51 3.18
1995-Institutional Shares........... 4.31 259.52 58,389 0.77 3.99
1995-Administration Shares.......... 4.14 259.52 46 1.02 3.82
1995-Service Shares................. 3.87 259.52 454 1.27 3.55
1994-Institutional Shares........... 3.74 354.00 83,704 0.61 3.58
1994-Administration Shares.......... 3.51 354.00 3,866 0.86 3.35
1994-Service Shares/(j)/............ 4.30/(b)/ 354.00 440 1.11/(b)/ 4.14/(b)/
1993-Institutional Shares........... 3.70 404.60 115,803 1.06 3.05
1993-Administration Shares/(j)/..... 3.32/(b)/ 404.60 911 1.07/(b)/ 2.95/(b)/
For the Period October 1, 1992/(g)/ through October 31,
- -----------------------------------------------------
1992-Institutional Shares........... 4.58/(b)/ 31.19/(f)/ 14,601 2.68/(b)/ 1.95/(b)/
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations Distributions to shareholders
----------------------------------------------------- ------------------------------
Net realized
Net realized and From net
and unrealized unrealized Total realized gain
gain (loss) gain (loss) income on
Net asset on investment, on foreign (loss) investment,
value at Net option and currency from From net option
beginning investment futures related investment investment and futures
of period income transactions transactions operations income transactions
-----------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... $10.00 $0.6448 $(0.0704) -- $0.5744 $(0.6438) $(0.0806)
1996-Administrative Shares(l)....... 9.91 0.4083 (0.0703) -- 0.3380 (0.4080) --
1996-Service Shares(l).............. 9.77 0.3756 0.0898 -- 0.4654 (0.3754) --
1995-Institutional Shares........... 9.24 0.6423 0.7610 -- 1.4033 (0.6433) --
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 10.00 0.4648 (0.7617) -- (0.2969) (0.4648) --
</TABLE>
<TABLE>
<CAPTION>
Distributions to shareholders
---------------------------------------------------
In excess of
net realized Net
gain on increase Ratio of
In excess investment, From Total (decrease) Net asset net
of net option and paid distributions in net value at expenses
investment futures in to asset end of Total to average
income transactions capital shareholders value period return(k) net assets
--------------------------------------------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996-Institutional Shares........... -- -- -- $(0.7244) $(0.1500) $9.85 5.98% 0.45%
1996-Administrative Shares(l)....... -- -- -- (0.4080) (0.0700) 9.84 3.56(f) 0.70(b)
1996-Service Shares(l).............. -- -- -- (0.3754) 0.0900 9.86 4.90(f) 0.95(b)
1995-Institutional Shares........... -- -- -- (0.6433) 0.7600 10.00 15.72 0.45
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... -- -- -- (0.4648) (0.7617) 9.24 (3.00) 0.45(b)
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
-------------------------
Ratio of Ratio of
net Net net
investment assets investment
income at end Ratio of income
(loss) Portfolio of expenses (loss)
to average turnover period to average to average
net assets rate(d) (in 000s) net assets net assets
------------------------------------------------------------
GS CORE FIXED INCOME FUND
- ---------------------------------------------------------------------------------------------
For the Year Ended October 31,
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996-Institutional Shares........... 6.51% 414.20% $72,061 0.83% 6.13%
1996-Administrative Shares(l)....... 6.41(b) 414.20 702 1.08(b) 6.03(b)
1996-Service Shares(l).............. 6.37(b) 414.20 381 1.33(b) 5.99(b)
1995-Institutional Shares........... 6.56 383.26 55,502 0.96 6.05
For the Period January 5, 1994(g)through October 31,
- ----------------------------------------------------
1994-Institutional Shares........... 6.48(b) 288.25 24,508 1.46(b) 5.47(b)
</TABLE>
- ------------------
(a)Calculated based on the average shares outstanding methodology.
(b)Annualized.
(c)Class A share activity commenced on May 15, 1995.
(d)Includes the effect of mortgage dollar roll transactions.
(e)Administration share activity commenced on April 15, 1993.
(f)Not annualized.
(g)Commencement of operations.
(h)GS Short Duration Government Fund Administration shares were redeemed in
full on February 23, 1995 and re-commenced on February 28, 1996 at $9.86.
(i)Service share activity commenced on April 10, 1996.
(j)Administration and service share activity commenced on May 20, 1993 and
September 20, 1994 respectively.
(k)Assumes investment at the net asset value at the beginning of the period,
reinvestment of all dividends and distributions, a complete redemption of the
investment at the net asset value at the end of the period and not sales
charges. For Class A shares only, total return would be reduced if a sales
charge were taken into account.
(l)Administration and Service share activity commenced on February 28, 1996 and
March 13, 1996 respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the GS Adjustable Rate Government
Fund, GS Short Duration Government Fund, GS Short Duration Tax-Free Fund and GS
Core Fixed Income Fund:
We have audited the accompanying statements of assets and liabilities of the
GS Adjustable Rate Government Fund, GS Short Duration Government Fund, GS Short
Duration Tax-Free Fund and GS Core Fixed Income Fund (portfolios of Goldman
Sachs Trust, a Massachusetts Business Trust) including the statements of
investments, as of October 31, 1996, and the related statements of operations,
the statements of changes in net assets and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the GS Adjustable Rate Government Fund, GS Short Duration Government
Fund, GS Short Duration Tax-Free Fund and GS Core Fixed Income Fund as of
October 31, 1996, the results of their operations and the changes in their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 12, 1996
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
-------------------------------------------------------------------
Annual Report
October 31, 1996
GS Adjustable Rate Government Fund
GS Short Duration Government Fund
GS Short Duration Tax-Free Fund
GS Core Fixed Income Fund
Goldman
Sachs
GST/AR/1096(INST)
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning each Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome the opportunity to review the performance and the investment
activity of the Goldman Sachs Fixed Income Funds for the 12-month period ended
October 31, 1996. To help put the portfolios' performance in perspective, we
will also provide a brief overview of the U.S. economy and the bond market
during the period.
We are pleased to report that the Goldman Sachs Fixed Income Funds fared
well relative to their peers during the period.
The Bond Market Sold Off Amid Rising Rates, Then Stabilized
The U.S. fixed income market began the 12-month period under review with a
robust rally, fueled by weak economic data and low inflation. However, in
February 1996, the bond market began to come under pressure when stronger than
expected economic and job growth as well as surging commodity prices aroused
fears of higher inflation on the horizon. Bond market conditions significantly
worsened during March and April, when a sharp rise in interest rates triggered a
sell-off and increased volatility. By early May, long-term bond yields had
climbed above the psychologically important 7.0% level for the first time in
nearly a year. At the end of May, interest rates began to stabilize and Treasury
prices remained in a narrow trading range throughout the summer and fall. During
September and October, however, interest rates retreated and the bond market
strengthened. The rebound was primarily due to evidence of a slowing U.S.
economy and strong demand for Treasury bonds from the central banks of China,
Japan and Germany, which accelerated their purchases dramatically toward the end
of the period. By the end of October, prices of 30-year Treasuries broke out of
the trading range that had persisted for over six months.
After a Weak Start, Economic Growth Rebounded, Then Moderated
In late 1995, the economy was anemic, with weak consumer and capital
spending contributing to a fourth-quarter real Gross Domestic Product (GDP)
growth of only 0.3% (annualized). During the first quarter of 1996, harsh winter
weather and the General Motors strike continued to restrain economic growth.
Despite these adverse conditions, the economy advanced faster than expected,
with first-quarter real GDP growth reported at 2.0% (annualized). Momentum
accelerated more dramatically during the second quarter, as industrial activity,
automobile sales and home sales all showed significant improvement. As a result,
second-quarter GDP rose a robust 4.7% (annualized), its highest rate in two
years.
The economy's torrid growth cooled markedly during the third quarter, with
annualized real GDP at a revised 2.0%, largely due to lackluster consumer
spending and a widening U.S. trade deficit. In October some evidence of a
slowdown continued, with housing starts falling to their lowest level in a year
and U.S. capacity utilization also down. However, consumer confidence remained
high against a backdrop of low unemployment and higher household income. These
indicators led some economists to interpret October's retail sales numbers (up a
scant 0.2%) as a "breather" they expected to be followed by stronger holiday
shopping, while others were concerned about a more prolonged period of
restrained spending. Despite investors' earlier fears of increased inflationary
<TABLE>
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Table of Contents
Market Overview 1 Financial Statements 24
Goldman Sachs Government Income Fund 4 Notes to Financial Statements 28
Goldman Sachs Global Income Fund 11 Financial Highlights 36
Goldman Sachs Municipal Income Fund 17
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
pressures and the fact that in October the producer and consumer price indexes
were up 0.4% and 0.3%, respectively, inflation remained subdued throughout the
period.
The Fed Remained Neutral After Easing in December and January
In response to generally poor year-end 1995 economic conditions, the U.S.
Federal Reserve cut the Federal funds rate by 25 basis points in December 1995
and an additional 25 basis points in January 1996. The Fed then remained neutral
from February through the end of the period, leaving the Federal funds rate at
5.25% as of October 31, 1996.
During the period under review, the yield curve shifted upward everywhere
but at the shortest end, where it steepened. The yield on six-month Treasury
bills fell from 5.55% on October 31, 1995 to approximately 5.26% on October 31,
1996. For the same time period, the yield on the 30-year U.S. Treasury bond rose
from 6.33% a year ago to 6.64%. For the 12-month period ended October 31, 1996,
the total returns of one-year and 30-year Treasuries were 5.84% and 0.72%,
respectively.
Historical Treasury Yield Curve
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
GS Retail Treasury Bar Chart
<S> <C> <C>
10/31/95 10/31/96
3-Month 5.49% 5.13
6-Month 5.55 5.26
1 5.54 5.4
2 5.61 5.73
3 5.68 5.86
5 5.81 6.07
10 6.02 6.34
30 6.33 6.64
</TABLE>
Source: Bloomberg, L.P.
The yield curve steepened on the short end and shifted upward on the longer
end.
The Dollar's Climb Versus the Mark and the Yen
Continued
During the period under review, the U.S. dollar appreciated against both the
Deutsche mark and Japanese yen, rising more against the yen. The dollar
strengthened relative to the mark as the Bundesbank progressively edged rates
lower during the period to stimulate the sluggish German economy, reaching a 15-
month high against the mark in May. By October, the dollar had retreated
slightly as further Bundesbank cuts became less likely. In contrast, the
dollar's climb against the yen continued through the end of October, when it
reached a three-and-a-half-year high. The yen's weakness was primarily due to
the softness in Japan's economic recovery. However, in November the yen rose
against the dollar as Japanese officials made it clear that they believed the
yen had weakened enough.
Outlook: Moderate Economic Growth for the Near Term
The recent economic weakness and the tame third-quarter labor cost report
increase the likelihood that the Fed will defer any changes in monetary policy
until 1997. Although a more extended slowdown is possible, as of this writing,
Goldman Sachs' economists believe a resumption of growth is likely if consumer
spending rebounds by year-end and the trade deficit does not significantly
widen. On the fiscal front, the bond market environment should benefit from the
recent election results with President Clinton balanced by a Republican-
controlled Congress, which points toward continued budgetary restraint.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
We appreciate your confidence in the Goldman Sachs Fixed Income Funds and we
look forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ David B. Ford
David B. Ford
Co-Head, Goldman Sach Asset Management
/s/ John P. McNulty
John P. McNulty
Co-Head, Goldman Sachs Asset Management
/s/ Sharmin Mossavar-Rahmani
Sharmin Mossavar-Rahmani
Chief Investment Officer - Fixed Income Investments
Goldman Sachs Asset Management
November 29, 1996
- --------------------------------------------------------------------------------
3
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Government Income Fund seeks to provide shareholders with
a high level of current income consistent with safety of principal. Under normal
conditions, at least 65% of the portfolio's total assets will be invested in
U.S. government securities and in repurchase agreements collateralized by such
securities. The fund may also invest in securities of nongovernmental issuers,
including asset-backed securities, privately issued mortgage-backed securities
and corporate debt obligations. Such securities will be rated triple-A at the
time of investment or, if unrated, deemed to be of comparable quality by Goldman
Sachs Asset Management, the fund's investment adviser. The fund's interest rate
sensitivity is expected to be comparable to that of a five-year bond.
Mortgage-Backed Securities Strengthened Amid Slowing Prepayments
During the 12-month period under review, the performance of mortgage-backed
securities (MBSs) was closely linked to the changing direction of interest
rates. From November 1995 through February 1996, declining interest rates
spurred homeowners to switch to long-term, fixed rate mortgages, resulting in a
high level of refinancing activity and widening spreads between MBSs and
Treasuries. Long-term interest rates began to rise at the end of January and
prepayments peaked in February. Throughout the spring, the mortgage-backed
securities market strengthened due to declining prepayment fears, and adjustable
rate mortgages (ARMs) and fixed rate mortgage pass-throughs continued to do well
when rates stabilized during the summer. However, the direction of interest
rates reversed course beginning in September, and by the end of October, rates
on 30-year mortgages had slipped below 8%. The decline increased some
homeowners' incentive to refinance, but rates continued to be significantly
above their levels of a year earlier and "seasoned" mortgage-backed securities
(securities backed by older mortgages that typically have lower prepayment risk)
continued to do well. In addition, the market's technical balance remained
strong, with prices supported by healthy investor demand coupled with no
significant new issuance.
Performance Review: Fund Performed Well Due to Mortgage-and Asset-Backed
Securities
During the 12-month period ended October 31, the fund's Class A shares
outperformed the benchmark, the Lehman Brothers Government/Mortgage Index (the
"Index") due to favorable results from the fund's positions in collateralized
mortgage obligations (CMOs) and asset-backed securities (ABSs). The fund's Class
B shares, which opened on May 1, 1996 when interest rates were still rising,
also achieved positive returns.
The fund performed well compared with its peers. The fund's Class A shares
ranked eighth out of 124 intermediate U.S. government income funds based on
total return for the 12 months ended October 31, 1996, according to Lipper
Analytical Services, Inc. (Please note that Lipper rankings do not take sales
charges into account and that past performance is not a guarantee of future
results. Class B shares were not ranked for this period because they were in
existence less than 12 months.)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
--------- ---------
<S> <C> <C>
Total Return (based on net asset value) 5.80% 4.85%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 6.56% 3.01%
- --------------------------------------------------------------------------------
Return From Price Depreciation/ -0.76% 1.84%
Appreciation
- --------------------------------------------------------------------------------
Total Return of Lehman Brothers
Government/Mortgage Index 5.74% 5.12%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.36 $14.37
- --------------------------------------------------------------------------------
NAV Change -$0.11 +$0.26
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Portfolio Composition and Investment Strategies
During the period under review, we significantly reduced the portfolio's
holdings of U.S. Treasuries in favor of mortgage-backed and asset-backed
securities.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
Agency Debentures 0.4%
Repos/Cash Equivalents 1.1%
U.S. Treasuries 16.2%
Asset-Backed Securities 19.9%
CMOs 22.0%
Fixed Rate Mortgage Pass-Throughs 40.4%
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Fixed Rate Mortgage Pass-Throughs. The fund's single largest position as of
October 31, 1996 was in fixed rate mortgage pass-throughs at 40.4% (nearly
unchanged from a year ago), which was overweighted relative to the Index
allocation of 36.4%. Overall, the fund benefited from the sector's incremental
yield compared with similar-duration Treasury securities. Although pass-throughs
suffered from a high rate of mortgage prepayments when the period began, the
sector improved when interest rates began to rise at the end of January.
During the period, we occasionally used mortgage dollar rolls, which helped
the portfolio to benefit from short-term supply and demand imbalances in the
mortgage settlement process. (Mortgage dollar rolls refer to transactions that
involve selling mortgage securities owned by the fund and simultaneously
contracting to buy back similar mortgage securities with the same coupon on a
specified future date -- usually one month forward.) At all times, we "cover"
the mortgage dollar rolls by keeping cash or high-grade liquid debt securities
equal to the dollar amount of the forward commitment in a segregated account
with the fund's custodian.
. CMOs. As of October 31, the fund's allocation in CMOs was 22.0%, up from
7.7% a year ago. These securities included sequential-pay/support CMOs (13.0%),
a position we initiated in February, which offered relative stability and
attractive spreads compared with Treasuries. We cut the portfolio's allocation
in planned amortization class (PAC) CMOs to 5.5% from 6.3% a year ago in favor
of other sectors that offered greater relative value. We also held very small
positions in inverse floaters, interest-only (IO) and principal-only (PO)
securities, discussed below.
. Asset-Backed Securities. The portfolio's ABS holdings, which were primarily
issues backed by credit card and automobile debt, represented 19.9% of the
portfolio, up from 14.3% a year ago. This position consisted of short-term,
triple-A-rated issues that offered attractive incremental yield over similar-
duration Treasuries. The ABS market began the period on a weak note, as concerns
surrounding credit card delinquencies impacted the sector during November and
December 1995. From January through the end of the period, these uncertainties
faded and the sector strengthened. Spreads between ABSs and Treasuries
tightened, as the ABS market benefited from strong investor demand from a
variety of sources: foreign banks, insurance companies and an increasing number
of corporate and CMO "crossover" accounts. ABS supply was robust as well, with a
wide variety of innovative new issues across a range of maturities, collateral
types and structures, but demand kept pace.
. U.S. Treasuries and Repurchase Agreements/Cash Equivalents. We reduced the
fund's allocation in U.S. Treasuries and repurchase agreements/cash equivalents
to take advantage of securities in other sectors that offered better relative
value. As of October 31, Treasuries accounted for 16.2% of the portfolio,
significantly
- --------------------------------------------------------------------------------
5
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
underweighted relative to the Index (55.4%), while cash equivalents were a 1.1%
position.
. Agency Debentures. During the period, we reduced the fund's holdings in
agency debentures (bonds issued by agencies of the U.S. government) to a scant
0.4% because we determined that the sector's tight spreads compared with
Treasuries did not offer attractive return potential.
. Issuer Composition. The breakdown of the portfolio's mortgage-backed
security holdings by issuer was 23.3% in Federal National Mortgage Association
(FNMA) issues, 14.0% in Government National Mortgage Association (GNMA) issues,
9.8% in Federal Home Loan Mortgage Corporation (FHLMC) issues and 15.3% in
private issues.
. Credit Quality. As of October 31, U.S. government and agency securities
accounted for 66.6% of the portfolio, triple-A-rated securities were 32.3% of
the portfolio and cash equivalents were 1.1% of the portfolio.
. Prudent Use of Derivatives. As noted, sequential-pay/ support and PAC CMOs,
which are generally considered to be lower risk derivative instruments,
accounted for 13.0% and 5.5% of the portfolio, respectively. The portfolio also
held inverse floaters (1.3%) for their potential to add incremental yield, as
well as a "combo" consisting of minor positions in interest-only and principal-
only CMOs. When IOs are held along with POs, they can produce a position with a
similar risk profile as a fixed rate mortgage pass-through but with a higher
yield. In addition, we used futures as a tool to help manage the portfolio's
duration.
. Duration. The fund's duration as of October 31 was 4.5 years, in line with
the Index. We carefully manage the fund's duration to approximate that of the
Index rather than attempting to make interest rate predictions. Instead, we seek
excess return over the Index through our sector weightings and specific security
selection.
Fund Outlook
We have a cautiously optimistic view of the mortgage pass-through market in
general. Certain segments continue to be attractively valued, and we believe
that our current seasoned holdings should fare well relative to other sectors if
interest rates continue to fall and prepayments increase. We have a neutral
outlook for the CMO sector in general, which we believe does not offer
significant value over mortgage pass-throughs. However, we continue to identify
specific CMO securities that present attractive investment opportunities. In the
ABS market, significant spread premiums relative to comparably rated corporate
securities are expected to continue to buoy investor demand. In addition, Fed
surveys indicate that banks have been tightening their underwriting standards
over the last three quarters, which should help to allay lingering investor
concerns surrounding consumer credit card delinquencies. During the coming year,
we will continue to actively allocate the portfolio's assets among the various
fixed income sectors as their relative value changes.
Distribution Policy
The fund's Class A shares paid out monthly distributions of approximately
$0.92 per share during the 12-month period ended October 31, 1996. From their
inception on May 1, 1996 through October 31, 1996, the fund's Class B shares
paid out approximately $0.41 per share. Dividends are declared daily and paid on
a monthly basis. The fund distributes substantially all of its taxable income,
as is required for all investment companies.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
- --------------------------------------------------------------------------------
We thank you for your support and look forward to continuing to serve your
investment needs in the future.
Sincerely,
/s/ Jonathan A. Beinner
Jonathan A. Beinner
/s/ Erica Adelberg
Erica Adelberg
/s/ James B. Clark
James B. Clark
Portfolio Managers
Goldman Sachs Government Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
7
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Government Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares), is
compared with its benchmarks--the Lehman Brothers Mutual Fund
Government/Mortgage Index ("Lehman Gov't/MBS Index") and the Lehman Brothers
Mutual Fund General U.S. Government Index ("Lehman U.S. Gov't Index"). All
performance data shown represents past performance and should not be considered
indicative of future performance which will fluctuate as market conditions
change. The investment return and principal value of an investment will
fluctuate with changes in market conditions so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A/(a)/
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman Lehman
(no sales (w/sales Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/93 $10,000 $ 9,550 $10,000 $10,000
10/31/93 10,506 10,033 10,584 10,699
10/31/94 10,192 9,734 10,267 10,220
10/31/95 11,710 11,183 11,819 11,792
10/31/96 12,392 11,834 12,500 12,395
</TABLE>
Class B
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares Lehman Lehman
(no redemption (w/redemption Gov't/MBS U.S. Gov't
Date charge) charge) Index Index
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5/1/96 $10,000 $10,000 $10,000 $10,000
10/31/96 10,485 9,985 10,512 10,508
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
Average Annual Total Return
----------------------------------------
One Year Since Inception/(b)/
- -----------------------------------------------------------------------------
<S> <C> <C>
Class A, excluding sales 5.80% 6.72%
charge
- -----------------------------------------------------------------------------
Class A, including sales 1.06% 5.41%
charge
- -----------------------------------------------------------------------------
Class B, excluding
redemption charge N/A 4.85%/(c)/
- -----------------------------------------------------------------------------
Class B, including
redemption charge N/A (0.15%)/(c)/
- -----------------------------------------------------------------------------
</TABLE>
/a/ For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations.
/b/ Class A and Class B shares commenced operations February 10, 1993 and May 1,
1996, respectively.
/c/ An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
8
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Government Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
<S> <C> <C> <C>
Mortgage Backed Obligations--55.5%
Federal Home Loan Mortgage Corp.(FHLMC)--10.3%
$ 3,000,000 7.50% TBA 30-Yr/(a)/ $ 3,010,290
- --------------------------------------------------------------------------------
Federal National Mortgage Association (FNMA)--16.5%
$ 989,360 7.00 02/01/26 $ 970,493
831,317 8.50 07/01/26 860,147
168,683 8.50 09/01/26 174,533
1,000,000 7.00 TBA 30-Yr/(a)/ 1,034,680
2,000,000 8.00 TBA 30-Yr/(a)/ 2,040,000
- --------------------------------------------------------------------------------
$ 5,079,853
- --------------------------------------------------------------------------------
Government National Mortgage Association
(GNMA)--14.1%
$ 939,735 7.00% 08/15/23 $ 927,115
353,966 9.00 TBA 30-Yr/(a)/ 377,748
1,363,733 7.50 TBA 30-Yr/(a)/ 995,228
2,000,000 8.00 TBA 30-Yr/(a)/ 2,045,000
- --------------------------------------------------------------------------------
$ 4,345,091
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligations--26.4%
Interest Only--0.7%
FNMA Interest-Only Stripped Security, Series 151, Class 2
$ 712,363/(b)/ 9.50% 07/25/22 $ 225,926
- --------------------------------------------------------------------------------
Inverse Floater--1.3%
FNMA Remic Trust, Series 1992-62, Class S
404,038 10.00%/(c)/ 05/25/99 413,699
- --------------------------------------------------------------------------------
Planned Amortization Class (PAC)--5.4%
FNMA Remic Trust, Series 1993-160, Class PG
1,000,000 6.30% 09/25/18 987,500
GE Capital Mortgage Services, Inc. Series 1994-11, Class A1
693,546 6.50 03/25/24 694,191
- --------------------------------------------------------------------------------
$ 1,681,691
- --------------------------------------------------------------------------------
Principal Only--1.4%
FNMA Remic Trust, Series G-35, Class N
575,000/(e)/ 5.28% 10/25/21 415,369
- --------------------------------------------------------------------------------
Sequential Fixed Rate CMOs--2.9%
Citicorp Mortgage Securities Series 1993-11, Class A6
907,177 6.25% 09/25/08 880,207
- --------------------------------------------------------------------------------
Support--13.2%
Bear Stearns Mortgage Securities, Inc., Series 1996-7, Class AD
$ 988,793 6.50% 11/27/23 900,395
GE Capital Mortgage Services, Inc. Series 1994-10, Class A22
996,703 6.50 03/25/24 874,966
Housing Securities, Inc. Series 1994-1, Class A13
1,455,585 6.50 03/25/09 1,370,928
Prudential Securities Series 1995-2, Class A
916,596 5.76 11/15/15 918,243
- --------------------------------------------------------------------------------
$ 4,064,532
- --------------------------------------------------------------------------------
Total Collateralized Mortgage Obligations $ 7,681,424
- --------------------------------------------------------------------------------
Total Mortgage Backed Obligations
(Cost $16,959,996) $17,106,368
- --------------------------------------------------------------------------------
Asset-Backed Securities--16.6%
Chemical Bank Master Credit Card Trust, Series 1995-2, Class A
$ 720,000 6.23% 06/15/03 $ 717,746
Fingerhut Master Trust, Series 1996-1, Class A
590,000 6.45 02/20/02 593,870
Ford Credit Auto Loan Master Trust, Series 1996-1, Class A
650,000 5.50 02/15/03 629,077
MBNA Master Credit Card Trust, Series 1991-1, Class A
245,000 7.75 10/15/98 245,688
Navistar Financial Corp. Owner Trust, Series 1995-A, Class A2
304,971 6.55 11/20/01 306,780
Olympic Automobile Receivables Trust, Series 1994-B, Class A2
540,182 6.85 06/15/01 544,666
Premier Auto Trust, Series 1993-6, Class A2
403,341 4.65 11/02/99 398,675
Premier Auto Trust, Series 1994-1, Class A3
310,533 4.75 02/02/00 308,592
Sears Credit Account Master Trust, Series 1995-2, Class A
460,000 8.10 06/15/04 483,000
Standard Credit Card Trust, Series 1990-3, Class A
860,000 9.50 07/10/98 875,583
- --------------------------------------------------------------------------------
Total Asset-Backed Securities
(Cost $5,174,476) $ 5,103,677
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
Goldman Sachs Government Income Fund (continued)
October 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
===============================================================================
<S> <C> <C> <C>
U.S. Government Agency Obligations--0.4%
Federal Home Loan Mortgage Corp. (FHLMC)
$ 110,000 8.20% 01/16/98 $ 110,636
- -------------------------------------------------------------------------------
Total Government Agency Obligations
(Cost $113,163) $ 110,636
- -------------------------------------------------------------------------------
U.S. Treasury Obligations--15.9%
United States Treasury Bonds/(d)/
$ 360,000 8.75% 05/15/17 $ 440,550
280,000 8.75 08/15/20 345,668
United States Treasury Notes/(d)/
2,210,000 7.38 11/15/97 2,249,360
700,000 5.88 04/30/98 702,184
700,000 6.88 08/31/99 717,500
United States Treasury Principal-Only Stripped Securities/(e)/
230,000 6.41 11/15/04 138,344
1,550,000 6.95 05/15/20 307,570
- -------------------------------------------------------------------------------
Total U.S. Treasury Obligations
(Cost $4,910,644) $ 4,901,176
- -------------------------------------------------------------------------------
Repurchase Agreement--27.0%
Joint Repurchase Agreement Account/(d)/
$8,400,000 5.58% 11/01/96 $ 8,400,000
- -------------------------------------------------------------------------------
Total Repurchase Agreement
(Cost $8,400,000) $ 8,400,000
- -------------------------------------------------------------------------------
Total Investments
(Cost $38,555,545/(f)/) $38,632,147
===============================================================================
Futures contracts open at October 31, 1996 are as follows:
Number of
Contracts Settlement Unrealized
Type Long(/g/) Month Gain
- -------------------------- ------------- ----------------- -----------
Euro Dollars 3 September 1997 $2,850
5 Year U.S. Treasury Notes 4 December 1996 3,000
10 Year U.S. Treasury Notes 2 December 1996 8,313
U.S. Long Term Bond 14 December 1996 60,437
------------
$74,600
===============================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $ 260,565
Gross unrealized loss for investments in which cost exceeds
value (195,408)
- -------------------------------------------------------------------------------
Net unrealized gain $ 65,157
===============================================================================
</TABLE>
/(a)/TBA (To Be Assigned) securities are purchased on a forward commitment basis
with an approximate (generally +/-2.5%) principal amount and no definite
maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
/(b)/Represents security with notional or nominal principal amount. The actual
effective yield of this security is different than the stated rate due to
the amortization of related premiums.
/(c)/Variable rate security. Coupon rate disclosed is that which is in effect at
October 31, 1996.
/(d)/Portions of these securities are being segregated for open TBA purchases,
open futures contracts and futures margin requirements.
/(e)/The interest rate disclosed for these securities represents effective
yields to maturity.
/(f)/The aggregate cost for federal income tax purposes is $38,566,990.
/(g)/Each 10-Year U.S. Treasury Note, 5-Year Treasury Note and U.S. Treasury
Bond contract represents $100,000 in notional par value. Each Euro Dollar
contract represents $1,000,000 in notional par value. The total notional
amount and market value are $5,000,000 and $2,936,825, respectively. The
determination of notional amounts and market value as presented here are
indicative only of volume of activity and not a measure of market risk.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Global Income Fund seeks high total return, composed of
both current income and capital appreciation. The fund is permitted to invest in
government and other high-quality (double-A or better) fixed income securities
issued in the United States and in foreign markets. The fund has the additional
flexibility to invest in sovereign (government) debt rated single-A (or better)
or deemed to be of comparable quality. The maximum duration of the fund is 7.5
years and its approximate interest rate sensitivity is comparable to that of a
six-year bond. Under normal market conditions, the fund's neutral position is to
be fully hedged into U.S. dollars to best serve the needs of U.S. shareholders.
However, the fund may engage in currency transactions, both to hedge exchange
rate risk and to seek to enhance returns.
European Bond Markets Achieved the Strongest Performance While Treasuries Lagged
During the 12 months ended October 31, 1996, global bonds generally
performed well, particularly during the second half of the period, with a number
of markets achieving extremely strong returns. Most international bond markets
have outperformed the United States, thus illustrating the benefits of
diversification.
The European higher yielding bonds (Italy, Spain and Sweden) were the best
performers of all the major bond markets during the period, while most of the
other European bond markets achieved good, albeit more modest, returns (hedged
into U.S. dollars). In general, European bond markets benefited from an
accommodative environment of sluggish economic growth and low inflation.
European bonds were also buoyed by tighter fiscal policies, as several European
countries attempted to reduce their deficits enough to qualify for European
monetary union. To counter less government spending, several countries (notably
Germany) attempted to stimulate economic growth by lowering their interest
rates.
The total return of Japanese Government Bonds (JGBs) during the period
under review was lower than those of most European bond markets but still
favorable (hedged into U.S. dollars). After lackluster performance during the
first half of the period amid fears of accelerating growth, JGBs experienced a
volatile, halting recovery when Japan's economy showed signs of weakening during
the summer and fall of 1996.
U.S. Treasuries underperformed all of the major bond markets. Though
Treasuries performed well in November and December 1995, accelerating economic
growth triggered a sharp correction from January through May 1996. The U.S. bond
market partially recovered when it rallied during September and October, but it
continued to lag. Within the dollar bloc, Canadian bonds did particularly well
during the period, reflecting a continuing easing of monetary policy by the Bank
of Canada, a strong currency and a relatively weak economy.
Performance Review: Favorable Country Allocations Benefited Fund Performance
During the period under review, the Goldman Sachs Global Income Fund's
Class A and Institutional shares outperformed the fund's benchmark, the J.P.
Morgan Global Government Bond Index (hedged into U.S. dollars) (the "Index").
The Index covers 14 major bond markets and reflects their currency exposures.
That favorable performance relative to the benchmark was primarily due to the
fact that during most of the period the fund was overweighted in European bonds
and moderately underweighted in U.S. Treasuries.
The fund's Class B shares, which began operations on May 1, 1996 while U.S.
interest rates were still rising, underperformed the benchmark.
- --------------------------------------------------------------------------------
11
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
Class A Class B* Institutional
(10/31/95- (5/1/96- (10/31/95-
10/31/96) 10/31/96) 10/31/96)
-------- -------- --------
<S> <C> <C> <C>
Total Return (based on net asset 11.05% 6.24% 11.55%
value)
- --------------------------------------------------------------------------------
Return From Monthly 10.50% 2.68% 11.07%
Distributions
- --------------------------------------------------------------------------------
Return From Price Appreciation 0.55% 3.56% 0.48%
- --------------------------------------------------------------------------------
Total Return of J.P. Morgan 10.06% 6.53% 10.06%
Global Government Bond Index
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.53 $14.53 $14.52
- --------------------------------------------------------------------------------
NAV Change +$0.08 +$0.50 +$0.07
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
Though the portfolio is typically fully hedged into U.S. dollars, we
occasionally employed currency strategies during the period. These included the
initiation of a long position in the U.S. dollar against the yen and European
currencies, which helped the fund's performance when the dollar strengthened
during the period.
Portfolio Composition and Investment Strategies
Portfolio Composition as of October 31, 1996*
<TABLE>
<CAPTION>
[PIE CHART APPEARS HERE]
<S> <C>
Sweden 1.9%
Denmark 2.5%
Spain 2.6%
Netherlands 2.6%
Ireland 2.7%
Italy 5.7%
U.K. 6.3%
Japan 9.0%
Germany 15.0%
Cash 15.4%
U.S. 36.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
. Dollar Bloc. As of October 31, 1996, U.S. Treasuries were the fund's sole
allocation in the dollar bloc countries. However, during the period, we
intermittently held positions in Canadian and Australian bonds.
U.S. During most of the period, the portfolio was underweighted in U.S.
Treasuries relative to the benchmark, which worked to its advantage when the
U.S. market was impacted by rising interest rates. In September and October, we
raised the fund's Treasury allocation, and the shift helped performance when the
Treasury market rallied during those months. As of October 31, the portfolio
held a 36.3% Treasury allocation, in line with the benchmark.
Other Dollar Bloc. The fund began the period overweighted in Canada (7.7%
as of October 31, 1995). However, we reduced the position in January and
liquidated the remainder in May on the expectation that Canada's current round
of interest rate easing had run its course, which proved not to be the case. In
July, we reestablished an overweighting in Canada, then sold the position the
following month after the market rallied. During September and October, the
Canadian bond market rose again on weaker economic news, but the fund did not
participate. Though the fund was not invested in Australia as of October 31, it
held an overweighted position at times during the period, which contributed to
performance when the market strengthened in anticipation of easing monetary
policy.
. Europe. The fund benefited from being overweighted in Europe during much of
the period. After we sold part of the allocation in the region at a profit, the
fund was slightly underweighted in European bonds relative to the Index, 39.3%
versus 43.9%, as of October 31.
Germany. Germany's economic growth was anemic during the first half of the
period, with real GDP declining during the fourth quarter of 1995 and the first
quarter of 1996. To help stimulate growth amid a tight fiscal policy, the
Bundesbank aggressively cut interest rates, which proved only modestly
successful as high unemployment and weak manufacturing activity continued to
persist. To
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
participate in Germany's favorable bond market environment, we significantly
overweighted our holdings at 15.0% (versus 9.6% for the Index), preferring
Germany over France in the core European markets.
Italy, Spain and Sweden. During the period, we increased the fund's
allocation in the higher yielding European markets, then trimmed its exposure
after these markets became less favorably valued. In January, we initiated a
position in Italy, which was attractive due to its tight fiscal policy, expected
interest rate cuts and better than anticipated inflation data. As of October 31,
Italy was overweighted relative to the benchmark, 5.7% versus 5.2%, and it
significantly benefited the fund as it proved to be the best performing bond
market during the period. Spain, another top-performing bond market, was cut to
a 2.6% position as of October 31 after we determined the market fully reflected
expectations that Spain would meet the criteria for European monetary union. We
also benefited by establishing and maintaining an overweighted position in
Sweden during most of the period, then subsequently reduced the position to
1.9%, nearly in line with the benchmark.
U.K. The U.K.'s economy was sluggish during much of the period, but by
September economic activity began to rebound, particularly in the consumer
sector. In anticipation of renewed inflationary pressures, as well as political
uncertainty related to the forthcoming general election, we sold approximately
half of the portfolio's U.K. position during the period. As of October 31, the
portfolio's 6.3% U.K. weighting was in line with the benchmark.
Ireland, the Netherlands and Denmark. Small, new positions added during the
period included Ireland (2.7%), the Netherlands (2.6%) and Denmark (2.5%). Like
the rest of Europe, these countries had attractive bond market environments, and
they contributed to the fund's performance. We believe Ireland is particularly
attractive as it has an exemption on its debt level, enabling it to join
European monetary union (EMU) on the first round.
France. Over the course of the year we reduced the fund's position in
France, finally liquidating our remaining holdings in July, in favor of German
bonds that we believed were more attractively valued. Unfortunately, this
strategy was not successful when France subsequently outperformed Germany.
Belgium. Belgium, a 3.5% allocation last year, performed well and we
trimmed the position over the course of the year. In October, we sold the fund's
remaining holdings in Belgium in favor of the Netherlands, which our analysis
determined offered greater total return potential.
. Japan. JGBs accounted for 9.0% of the portfolio, significantly
underweighted compared with the benchmark (15.1%), which benefited the fund when
JGBs were weak during the first half of the period, but did not work in its
favor when JGBs rebounded in the second half of the year. However, the fund
partially participated in the Japanese bond rally through a call option on JGBs,
as well as its direct investments.
. Cash Equivalents. The fund's allocation in cash equivalents was 15.4%,
approximately the same as a year ago (16.4%). We anticipate reducing the
position as we identify attractive investment opportunities.
. Credit Quality. The portfolio was 100% invested in triple-A-rated
securities as of the end of the period.
. Duration. As of October 31, the fund's duration of 4.4 years was
approximately a half year lower than that of the benchmark. (Duration is a
measurement of the fund's sensitivity to interest rate movements; the shorter
the duration, the less the fund's net asset value [NAV] should move in relation
to interest rate fluctuations.) The duration difference was primarily due to the
portfolio's cash equivalent position and its underweighting in Japan.
- --------------------------------------------------------------------------------
13
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund (continued)
- --------------------------------------------------------------------------------
Fund Outlook
Going forward, we expect European bonds to continue to outperform U.S.
Treasuries, in terms of both capital gains and yields. In general, European
economies are weaker than that of the United States, with slow growth, high
unemployment and tight fiscal policies. Germany's economic recovery appears
intact, which makes us somewhat more cautious on German bonds at current low
yield levels. Nevertheless, German bonds still offer excess returns over cash,
provided German monetary policy remains on hold. Longer term, we favor the U.K.
gilt, as we believe the market has overreacted to the U.K.'s lack of
participation in European monetary union and its recent political uncertainty.
We also have a positive longer term view of the higher yielding markets of Italy
and Spain, though they have not offered investors a sufficient risk premium in
recent months. As of this writing, we are neutral on U.S. Treasuries, but we
will be watching for signs that the U.S. Federal Reserve expects to preempt any
potential inflationary pressure with tighter monetary policy in the near future.
Our analysis indicates that after their spectacular run, Canadian bonds do not
offer attractive relative value, but we are considering reestablishing a
position in Australia, which is experiencing slowing growth and waning
inflationary pressures. We expect to remain underweighted in Japan because we
anticipate that its economic recovery will resume despite recent weakness,
opening the possibility for monetary tightening. With JGBs currently yielding
just under 3%, our analysis indicates that we would not be adequately
compensated for their level of risk.
Distribution Policy
During the 12-month period under review, the fund's Class A and
Institutional shares paid out distributions of $1.43 and $1.50 per share,
respectively. From their inception on May 1, 1996 through October 31, 1996, the
fund's Class B shares paid out $0.36 per share. The fund declares and pays
dividends on a monthly basis. The fund distributes substantially all of its
taxable income, as is required for all investment companies.
As always, we will utilize the resources of Goldman, Sachs & Co.'s London-
based Economics Research Group for economic and market trend analysis as we
continue to seek out attractive global bond investment opportunities. We
appreciate your investment in the Goldman Sachs Global Income Fund and look
forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Stephen C. Fitzgerald
Stephen C. Fitzgerald
Portfolio Manager, Fixed Income Investments
/s/ Andrew F. Wilson
Andrew F. Wilson
Portfolio Manager, Fixed Income Investments
/s/ Gareth I. Evans
Gareth I. Evans
Portfolio Manager, Currency
Goldman Sachs Global Income Fund
London, November 29, 1996
- --------------------------------------------------------------------------------
14
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Global Income Fund (assuming both the maximum
sales charge of 4.5% and no sales charge for the Class A shares, the first year
maximum redemption fee of 5% and no redemption fee for the Class B shares and
net asset value for the Institutional shares) is compared with its benchmark--
the J.P. Morgan Global Government Bond Index hedged to U.S. Dollars ("J.P.
Morgan GGB Index-$ Hedged"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
[CHART APPEARS HERE]
Class A Shares (a)
<TABLE>
<CAPTION>
Class A Shares Class A Shares J.P. Morgan GGB Index-
(no sales charge) (w/sales charge) $ Hedged
<S> <C> <C> <C>
09/01/91 $10,000 $9,500 $10,000
10/31/91 $10,145 $9,688 $10,263
10/31/92 $11,034 $10,538 $11,156
10/31/93 $12,220 $11,670 $12,509
10/31/94 $11,672 $11,146 $12,051
10/31/95 $13,432 $12,827 $13,903
10/31/96 $14,921 $14,250 $15,306
</TABLE>
Class B Shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class B Shares Class B Shares J.P. Morgan GGB
(no redemption charge) (w/redemption charge) Index-$ Hedged
<S> <C> <C> <C>
05/01/96 $10,000 $10,000 $10,000
10/31/96 $10,624 $10,124 $10,653
</TABLE>
Institutional shares
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Institutional J.P. Morgan GGB
Shares Index-$ Hedged
<S> <C> <C>
08/01/95 $10,000 $10,000
10/31/95 $10,442 $10,351
10/31/96 $11,651 $11,395
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Average Annual Total Return
----------------------------------------------------
One Year Five Year Since Inception(b)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Class A, excluding
sales charge 11.05% 8.01% 8.02%
- ---------------------------------------------------------------------------
Class A, including
sales charge 6.08% 7.02% 7.08%
- ---------------------------------------------------------------------------
Class B, excluding
redemption charge N/A N/A 6.24%(c)
- ---------------------------------------------------------------------------
Class B, including
redemption charge N/A N/A 1.24%(c)
- ---------------------------------------------------------------------------
Institutional Class 11.55% N/A 12.95%
- ---------------------------------------------------------------------------
</TABLE>
(a) For comparative purposes, initial investments are assumed to be made on the
first day of the month following the Fund's commencement of operations of
the Class A shares.
(b) The Class A, Class B and Institutional shares commenced operations August 2,
1991, May 1, 1996 and August 1, 1995, respectively.
(c) An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve months
of operations.
- --------------------------------------------------------------------------------
15
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Global Income Fund
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount (a) Rate Date Value
================================================================================
<S> <C> <C> <C>
Debt Obligations--83.2%
British Pound Sterling--6.2%
United Kingdom Treasury
BPS 9,000,000 8.50% 12/07/05 $ 15,573,120
- --------------------------------------------------------------------------------
Danish Krone--2.5%
Kingdom of Denmark
DKK 33,000,000 9.00% 11/15/00 $ 6,415,484
- --------------------------------------------------------------------------------
Deutschemark--14.8%
Federal Republic of Germany
DEM 8,000,000 7.12% 12/20/02 $ 5,742,980
7,500,000 6.75 07/15/04 5,245,292
33,000,000 6.50 10/14/05 22,549,455
3,500,000 7.38 01/03/05 2,528,510
Treuhandanstalt
2,000,000 6.50 04/23/03 1,388,437
- --------------------------------------------------------------------------------
$ 37,454,674
- --------------------------------------------------------------------------------
Irish Pound--2.7%
Republic of Ireland
IEP 4,000,000 8.00% 10/18/00 $ 6,905,421
- --------------------------------------------------------------------------------
Italian Lira--5.4%
Republic of Italy
ITL 19,000,000,000 10.50% 11/01/00 $ 13,851,419
- --------------------------------------------------------------------------------
Japanese Yen--8.9%
International Bank for Reconstruction &
Development
JPY 700,000,000 6.75% 06/18/01 $ 7,536,474
Japanese Developmental Bank
1,400,000,000 6.50 09/20/01 15,019,116
- --------------------------------------------------------------------------------
$ 22,555,590
- --------------------------------------------------------------------------------
Netherlands Guilder--2.5%
Dutch Government Bond
NLG 10,000,000 7.00% 06/15/05 $ 6,350,937
- --------------------------------------------------------------------------------
Spanish Peseta--2.5%
Government of Spain
ESP 500,000,000 10.30% 06/15/02 $ 4,448,842
Kingdom of Spain
200,000,000 10.15 01/31/06 1,804,930
- --------------------------------------------------------------------------------
$ 6,253,772
- --------------------------------------------------------------------------------
Swedish Krona--1.8%
Kingdom of Sweden
SEK 32,000,000 6.00% 02/09/05 $ 4,489,558
- --------------------------------------------------------------------------------
United States Dollar--35.9%
United States Treasury Notes
USD 10,000,000 6.88% 07/31/99 $ 10,243,700
18,000,000 5.25 01/31/01 17,507,880
17,000,000 6.38 03/31/01 17,196,520
8,200,000 6.25 02/15/03 8,229,438
10,000,000 7.88 11/15/04 10,975,000
12,000,000 6.50 08/15/05 12,125,640
14,000,000 7.00 07/15/06 14,616,840
- --------------------------------------------------------------------------------
$ 90,895,018
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $206,293,080) $210,744,993
- --------------------------------------------------------------------------------
Short-Term Obligations--15.4%
Euro-Time Deposit
USD 38,987,507 5.50% 11/01/96 38,987,507
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $38,987,507) $ 38,987,507
- --------------------------------------------------------------------------------
Total Investments
(Cost $245,280,587/(b)/ ) $249,732,500
================================================================================
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which
value exceeds cost $6,414,087
Gross unrealized loss for investments in which cost
exceeds value (2,188,683)
- --------------------------------------------------------------------------------
Net unrealized gain $4,225,404
================================================================================
</TABLE>
/(a)/ The principal amount of each security is stated in the currency in which
the bond is denominated. See below.
BPS = British Pound Sterling ITL = Italian Lira
NLG = Netherlands Guilder JPY = Japanese Yen
DKK = Danish Krone ESP = Spanish Peseta
DEM = Deutschemark SEK = Swedish Krona
IEP = Irish Pound USD = United States Dollar
/(b)/ The aggregate cost for federal income tax purposes is $245,507,096. The
percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
- --------------------------------------------------------------------------------
Investment Objective
The Goldman Sachs Municipal Income Fund seeks to provide a high level of
current income that is exempt from regular federal income tax, consistent with
the preservation of capital. In pursuit of its objective, the fund invests in a
diversified portfolio of municipal securities with a weighted average credit
quality of double-A or better. The fund buys only investment-grade securities
or, if unrated, deemed to be of comparable quality. Under normal interest rate
conditions, the fund's duration is expected to be within one year of its
benchmark, the Lehman Brothers 15-Year Municipal Bond Index. The fund's
approximate interest rate sensitivity is comparable to that of a 15-year bond.
After a Weak Start, the Municipal Bond Market Strengthened
The municipal bond market outperformed Treasuries during the 12-month
period under review, though both markets came under pressure when rates rose
during the first half of 1996. The average price of a 15-year municipal bond (as
calculated from data provided by Municipal Market Data, an independent municipal
market information provider) rose approximately 0.50%, while yields declined
from 5.35% on October 31, 1995 to 5.30% on October 31, 1996.
The municipal bond market began the period under review on a weak note. Tax
reform uncertainty impacted investor demand during November and December 1995,
while municipal bond supply was high due to seasonably heavy year-end issuance
and relatively low interest rates. The market environment improved during
January and February 1996, when fading tax reform concerns helped to revive
investor interest in the sector and issuance declined. From March through the
end of the period, the market's technical balance was generally healthy, though
occasional spikes in supply periodically overwhelmed demand and briefly impacted
performance. The largest of these surges occurred in June when supply rose to
its highest level since late 1995, but subsequently both new issuance and
secondary supply fell dramatically from July through September.
On the demand side, interest in municipal bonds was generally stable until
late summer and early fall. Demand from individual investors (who control
approximately 65% of municipal bond ownership either through mutual funds or
direct investment) began to decline when interest rates declined and municipal
yields fell below the psychologically significant 6% level. In addition,
property/casualty companies (who control approximately 10% of municipal bond
ownership) also dropped out of the market because the sector had become somewhat
unattractive relative to Treasuries. The supply drought finally abated in
October when many issuers sought to take advantage of lower interest rates, and
a continued weakness in demand caused municipals to underperform taxable bonds
for the month.
Municipal Bond Yield Curve
[YIELD CURVE LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Year of Maturity 10/31/96 10/31/95
---------------- -------- --------
<S> <C> <C>
1997 3.6 3.9
1998 3.9 4.1
1999 4.15 4.2
2000 4.3 4.3
2001 4.4 4.4
2002 4.5 4.5
2003 4.6 4.6
2004 4.7 4.7
2005 4.8 4.8
2006 4.9 4.95
2007 5 5.05
2008 5.1 5.15
2009 5.2 5.25
2010 5.25 5.35
2011 5.3 5.4
2012 5.35 5.45
2013 5.4 5.5
2014 5.4 5.55
2015 5.45 5.55
2016 5.45 5.55
2017 5.45 5.55
2018 5.5 5.55
2019 5.5 5.6
2020 5.5 5.6
2021 5.5 5.6
2022 5.5 5.6
2023 5.5 5.6
2024 5.5 5.6
2025 5.5 5.6
</TABLE>
The yield curve steepened at the short end and shifted downward at the longer
end.
Performance Review: Term Structure, Sector Weightings and Security Selection
Contributed to the Fund's Favorable Performance
During the period under review, the fund's Class A shares outperformed
their benchmark, the Lehman Brothers 15-Year Municipal Bond Index (the "Index").
The fund's Class B shares, which opened on May 1, 1996 while interest rates were
still rising, also performed well but slightly lagged the benchmark.
- --------------------------------------------------------------------------------
17
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We are pleased to report that the fund's Class A shares outperformed most of
their peers. For the 12 months ended October 31, 1996, Class A shares ranked in
the top 20% of general municipal debt funds (36 out of 228) based on total
return, according to Lipper Analytical Services, Inc. (Please note that Lipper
rankings do not take sales charges into account and that past performance is not
a guarantee of future results. Class B shares were not included because they
were not in existence during the entire 12-month period.)
- --------------------------------------------------------------------------------
Performance Summary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B*
(10/31/95- (5/1/96-
10/31/96) 10/31/96)
-------- --------
<S> <C> <C>
Total Return (based on net asset value) 6.13% 4.40%
- --------------------------------------------------------------------------------
Return From Monthly Distributions 4.72% 1.98%
- --------------------------------------------------------------------------------
Return From Price Appreciation 1.41% 2.42%
- --------------------------------------------------------------------------------
Lehman Brothers 15-Year Municipal
Bond Index 5.99% 4.80%
- --------------------------------------------------------------------------------
NAV (as of 10/31/96) $14.37 $14.37
- --------------------------------------------------------------------------------
NAV Change +$0.20 +$0.34
- --------------------------------------------------------------------------------
</TABLE>
* New share class opened during the period.
The fund's positive performance during the period can be attributed to our
term structure management, sector weightings and specific security selections.
. The portfolio's neutral term structure is "credit-barbelled," emphasizing
high-quality bonds with maturities of 20 to 30 years on the long end of the
yield curve and lower quality bonds with four to ten year maturities on the
short end of the curve. However, during the period, we regularly adjusted the
term structure to take advantage of changing market conditions. For example,
when the municipal bond yield curve flattened during September and the beginning
of October, we sold securities in the 20- to 30-year range in favor of 15- to
20-year bonds. In mid-October, the yield curve steepened as we anticipated, and
the fund's 15- to 20-year bonds outperformed 20- to 30-year bonds. By the end of
the month, when longer maturity bonds had become more attractively valued, we
reestablished a more evenly distributed maturity structure.
. In September, we underweighted the fund's municipal bond position relative
to the Index when our analysis indicated that municipal bonds had become
expensive compared with Treasuries. We replaced a small percentage of the fund's
duration with U.S. Treasury bond futures contracts, which we preferred over
buying Treasuries directly because they allowed us to participate in a Treasury
rally without incurring taxable net investment income. This strategy proved
successful when municipal bonds underperformed Treasuries in October, and we
returned the fund to its 100% municipal bond weighting after municipals had
cheapened to an attractive level at the end of the month.
. The fund's performance also benefited from our extensive credit analysis.
Our research helped us identify specific investment opportunities, such as
"story" bonds. These securities are often misunderstood or incorrectly valued,
but can have unique security structures and attractive yield potential.
Portfolio Composition and Investment Strategies:
Revenue Bonds Were Stressed Over GOs
Portfolio Composition as of October 31, 1996*
[PIE CHART APPEARS HERE]
<TABLE>
<S> <C>
Variable Rate Demand Notes 7.6%
General Obligations 5.5%
Insured Revenue Bonds 34.7%
Revenue Bonds 27.9%
Insured General Obligations 24.3%
</TABLE>
* The percentages shown are of total portfolio investments that have settled and
include an offset to cash equivalents relating to unsettled trades. These
percentages may differ from those in the accompanying Statement of Investments,
which reflect portfolio holdings as a percentage of net assets.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
. Revenue Bonds. We emphasized revenue bonds over general obligation bonds
because the sector offers higher yields and better price appreciation potential.
As of October 31, the fund held a 62.6% position in a combination of insured and
uninsured revenue bonds, overweighted compared with the Index (53.9%). (Revenue
bonds pay interest and principal out of a specific revenue stream, such as sales
taxes, hospital charges, tolls, electric rates and airport fees.)
. General Obligation (GO) Bonds. As of October 31, the fund's GO holdings,
which are backed by the general taxing power of a municipality, were
underweighted relative to the Index, 29.8% versus 45.6%. Though the fund's total
GO allocation was little changed from a year ago, we did increase its weighting
in insured GOs (to 24.3% versus 12.6% last year) and reduced uninsured GOs (to
5.5% versus 16.6% last year) due to security-specific investment opportunities.
. Variable Rate Demand Notes (VRDNs). VRDNs, which are high-quality cash
equivalents, were used to manage the portfolio's excess liquidity. The position
accounted for 7.6% of the portfolio, nearly unchanged from last year.
. Credit Quality. During the period, the fund's average credit quality has
remained double-A. However, in contrast to last year's emphasis on triple-A-
rated bonds, this year the fund's credit quality was structured like a
"barbell," with higher quality securities at the long end of the yield curve and
lower quality securities (but still investment grade) at the short end. As of
October 31, 70.5% of the fund was invested in triple-A-rated securities, nearly
the same as a year ago, while double-A- and single-A-rated securities were
reduced to 9.3% and 1.8%, respectively. In the late spring of 1996, we initiated
a new position in triple-B-rated securities (the lowest credit category for
investment-grade securities), which accounted for 18.4% of the portfolio by the
end of the period. We used extensive credit research to identify specific
securities that offered higher yields than average triple-B-rated securities,
but still were of sound credit quality. The triple-B-rated position benefited
the fund's performance during the period by enabling us to lock in above-market
yields and providing greater price appreciation potential relative to the
market. Each of these positions is monitored carefully, and we will remain
vigilant for any changes in their credit quality.
Market Outlook
We have a bullish long-term outlook for municipal bond supply, since new
money issuance (bonds issued for purposes other than refunding older debt) tends
to be stable and grows at the same rate as GDP. In addition, we do not
anticipate a significant increase in refunding unless interest rates drop
substantially. On the demand side, investor interest is likely to remain
healthy, as we believe that two to four more years of divided government (a
Democratic president and a Republican-controlled Congress) should avert any
significant tax reform that would threaten municipal bonds' tax-exempt status.
Distribution Policy
During the period under review, the fund's Class A shares paid out
distributions of $0.65 per share. The fund's Class B shares, which opened on May
1, 1996, paid out $0.27 per share from their inception through October 31, 1996.
Dividends are declared daily and paid on a monthly basis. The fund intends to
distribute substantially all of its investment company tax-exempt and taxable
income, as required by tax law.
- --------------------------------------------------------------------------------
19
<PAGE>
Letter to Shareholders
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
- --------------------------------------------------------------------------------
We value your investment in the Goldman Sachs Municipal Income Fund and we
look forward to reporting on the fund's progress in the coming year.
Sincerely,
/s/ Benjamin S. Thompson
Benjamin S. Thompson
/s/ Elisabeth Schupf Lonsdale
Elisabeth Schupf Lonsdale
Portfolio Managers
Goldman Sachs Municipal Income Fund
November 29, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
In accordance with the requirements of the Securities and Exchange Commission,
the following data is supplied for the periods ended October 31, 1996. The
performance for the Goldman Sachs Municipal Income Fund (assuming both the
maximum sales charge of 4.5% and no sales charge for Class A shares and the
maximum redemption fee of 5% and no redemption fee for the Class B shares) is
compared with its benchmark--the Lehman Brothers 15-Year Municipal Bond Index
("Lehman 15-Year Muni Index"). All performance data shown represents past
performance and should not be considered indicative of future performance which
will fluctuate as market conditions change. The investment return and principal
value of an investment will fluctuate with changes in market conditions so that
an investor's shares, when redeemed, may be worth more or less than their
original cost.
HYPOTHETICAL $10,000 INVESTMENT
Class A /(a)/
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman 15-year
Date (no sales charge) (w/sales charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
8/1/93 $10,000 $9,550 $10,000
- --------------------------------------------------------------------------------
10/31/93 $10,455 $9,984 $10,385
- --------------------------------------------------------------------------------
10/31/94 $9,878 $9,434 $9,860
- --------------------------------------------------------------------------------
10/31/95 $11,241 $10,735 $11,414
- --------------------------------------------------------------------------------
10/31/96 $11,933 $11,395 $12,100
- --------------------------------------------------------------------------------
</TABLE>
Class B
[LINE CHART APPEARS HERE]
<TABLE>
<CAPTION>
Class A Shares Class A Shares Lehman
(no redemption (w/redemption 15-year
Date charge) charge) Muni Index
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
5/1/96 10,000 10,000 10,000
- --------------------------------------------------------------------------------
Oct 31, 96 10,440 9,940 10,480
- --------------------------------------------------------------------------------
</TABLE>
-----------------------------------
Average Annual Total Return
-----------------------------------
One Year Since Inception/(b)/
--------------------------------------------------------
Class A, excluding
sales charge 6.13% 5.27%
--------------------------------------------------------
Class A, including
sales charge 1.35% 3.80%
--------------------------------------------------------
Class B, excluding
redemption charge N/A 4.40%/(c)/
--------------------------------------------------------
Class B, including
redemption charge N/A (0.60%)/(c)/
--------------------------------------------------------
/(a)/For comparative purposes, Class A initial investment is assumed to be made
on the first day of the month following the Fund's commencement of
operations.
/(b)/Class A and Class B commenced operations July 20, 1993 and May 1, 1996,
respectively.
/(c)/An aggregate total return (not annualized) is shown instead of an average
annual total return since the B Class has not completed a full twelve
months of operations.
- --------------------------------------------------------------------------------
21
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations--102.2%
Arizona--5.1%
Maricopa County, AZ Unified School District No. 41 GO
(FSA)(AAA/Aaa)
$2,500,000 6.25% 07/01/15 $ 2,653,300
- --------------------------------------------------------------------------------
California--8.1%
Contra Costa, CA Water District Series G RB (MBIA)
(AAA/Aaa)
$2,000,000 5.75% 10/01/14 $ 2,022,980
San Buenaventura, CA Sewer Revenue RB (FGIC)
(AAA/Aaa)
2,255,000 5.50 03/01/15 2,231,435
- --------------------------------------------------------------------------------
$ 4,254,415
- --------------------------------------------------------------------------------
Colorado--4.8%
Englewood MFH RB (BBB)
$2,500,000 6.65% 12/01/26 $ 2,499,750
- --------------------------------------------------------------------------------
Connecticut--3.9%
Mashantucket Western Pequot Tribe RB (BBB/Baa)
$2,000,000 6.50% 09/01/05 $ 2,072,220
- --------------------------------------------------------------------------------
Florida--2.8%
Escambia County, FL Housing Authority, Single Family
(GNMA/FNMA)(Aaa)
$1,390,000 6.80% 10/01/15 $ 1,464,949
- --------------------------------------------------------------------------------
Illinois--19.1%
Chicago, IL GO Series A-2 (AMBAC) (AAA/Aaa) (e)
$1,750,000 6.25% 01/01/14 $ 1,877,873
Cook County, IL GO(FGIC) (AAA/Aaa)
2,000,000 5.75 11/15/12 2,015,720
Lake County, IL Unified School District No. 116 GO (FSA) (AAA/Aaa)
2,000,000 7.60 02/01/14 2,428,340
1,525,000 6.10 02/01/16 1,588,089
O'Hare International Airport RB (MBIA)(AAA/Aaa)
2,000,000 6.38 01/01/15 2,109,780
- --------------------------------------------------------------------------------
$10,019,802
- --------------------------------------------------------------------------------
Indiana--9.5%
East Allen, IN Elementary School Building Corp. RB (FSA)
(AAA/Aaa)
$3,115,000 5.88% 07/01/12 $ 3,178,079
Indiana Transportation Finance Authority RB Series A
(MBIA) (AAA/Aaa)
1,500,000 7.25 06/01/15 1,789,305
- --------------------------------------------------------------------------------
$ 4,967,384
================================================================================
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Kentucky--2.0%
Nelson County, KY Industrial Building RB for Mabex
Universal Corp. Project AMT (A3)
$1,000,000 6.50% 04/01/05 $ 1,066,790
- --------------------------------------------------------------------------------
Maine--1.5%
Maine Educational Loan Authority RB Series A-1 (Aaa)
$ 725,000 6.80% 12/01/07 $ 765,462
- --------------------------------------------------------------------------------
Michigan--3.6%
Detroit, MI GO (BBB-)
$1,885,000 5.70% 05/01/02 $ 1,907,714
- --------------------------------------------------------------------------------
New York--9.0%
New York State Municipal Bond Agency RB, Series A (BBB+)
$1,610,000 6.60% 03/15/01 $ 1,699,854
New York State Thruway Authority Highway & Bridges RB
(BBB/Baa1)
1,000,000 5.25 04/01/03 1,004,630
Syracuse, NY IDA RB (AA)
2,000,000 5.13 10/15/02 2,005,600
- --------------------------------------------------------------------------------
$ 4,710,084
- --------------------------------------------------------------------------------
North Dakota--3.8%
Mercer County, ND PCRB for Basin Electric Power 2nd
Series (AMBAC) (AAA/Aaa) (e)
$2,000,000 6.05% 01/01/19 $ 2,055,380
- --------------------------------------------------------------------------------
Ohio--8.9% Akron, OH COPs (a) (BBB) (c)
$2,000,000 6.90% 12/01/16 $ 1,438,500
Kent State University RB (MBIA) (AAA/Aaa)
2,280,000 5.50 05/01/28 2,181,504
Trumbull County, OH GO (AMBAC) (AAA/Aaa)
1,000,000 5.75 12/01/03 1,061,870
- --------------------------------------------------------------------------------
$ 4,681,874
- --------------------------------------------------------------------------------
Texas--8.8%
Denison, TX Waterworks & Sewer RB (AAA/Aaa)
$1,250,000 5.50% 09/01/08 $ 1,258,525
1,250,000 5.40 09/01/09 $ 1,258,475
East Texas Criminal Justice Facilities Financing Corp. RB
(AMBAC) (AAA/Aaa)
$2,000,000 5.75 11/01/09 $ 2,032,560
Fort Bend, TX Independent School District RB (AAA/Aaa)
50,000 5.00 02/15/18 46,226
- --------------------------------------------------------------------------------
$ 4,595,786
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
22
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Goldman Sachs Municipal Income Fund (continued)
October 31, 1996
- --------------------------------------------------------------------------------
Principal Interest Maturity
Amount Rate Date Value
================================================================================
Debt Obligations(continued)
Washington--7.1%
Chelan County, WA Public Utility RB (AAA/Aaa)/c/
$2,500,000 6.35% 07/01/28 $ 2,540,125
Washington State Series C GO (AA/Aa)
1,155,000 6.50 07/01/00 1,232,373
- --------------------------------------------------------------------------------
$ 3,772,498
- --------------------------------------------------------------------------------
Wisconsin--4.2%
Wisconsin Housing & Economic Development Authority RB,
Series B (AA/Aa)/e/
$2,060,000 7.10% 09/01/15 $ 2,181,623
- --------------------------------------------------------------------------------
Total Debt Obligations
(Cost $52,677,902) $53,669,031
- --------------------------------------------------------------------------------
Short-Term Obligations--8.4%
Alabama--6.5%
Columbia County, AL IDB/b/ (A/A2)
$1,200,000 3.65% 11/01/96 $ 1,200,000
Parrish, AL IDB/b/ (A/A1)
2,200,000 3.65 11/01/96 2,200,000
- --------------------------------------------------------------------------------
$ 3,400,000
- --------------------------------------------------------------------------------
Wyoming--1.9%
Converse, WY PCRB/b/ (AAA)
$1,000,000 3.65% 11/01/96 $ 1,000,000
- --------------------------------------------------------------------------------
Total Short-Term Obligations
(Cost $4,400,000) $ 4,400,000
- --------------------------------------------------------------------------------
Total Investments
(Cost $57,077,902/d/) $58,069,031
================================================================================
- --------------------------------------------------------------------------------
================================================================================
Federal Income Tax Information:
Gross unrealized gain for investments in which value
exceeds cost $ 1,018,643
Gross unrealized loss for investments in which cost
exceeds value (27,514)
- --------------------------------------------------------------------------------
Net unrealized gain $ 991,129
================================================================================
/a/The interest rate disclosed for these securities represents effective
yields to maturity.
/b/Securities with "Put" features with resetting interest rates. Maturity
dates disclosed are the next interest reset dates.
/c/When-issued security.
/d/The amount stated also represents aggregate cost for federal income tax
purposes.
/e/Portions of these securities are being segregated for when-issued securities.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of net assets.
================================================================================
Investment Abbreviations:
AMBAC --Insured by American Municipal
Bond Assurance Corp.
COPS --Certificates of Participation
FGIC --Insured by Financial Guaranty
Insurance Co.
FSA --Financial Security Assurance Co.
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
MBIA --Insured by Municipal Bond Investors
Assurance
MFH --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RB --Revenue Bond
================================================================================
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
23
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
========================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value (cost $38,555,545, $245,280,587
and $57,077,902) $38,632,147 $249,732,500 $58,069,031
Receivables:
Investment securities sold 3,011,458 -- --
Interest 255,950 4,572,733 688,717
Forward foreign currency exchange contracts -- 1,073,237 --
Fund shares sold 38,729 23,757 12,145
Foreign tax withheld -- 100,251 --
Cash 17,149 248 48,127
Variation margin 6,788 -- --
Deferred organization expenses, net 23,998 -- 30,090
Other assets 65,284 31,883 29,773
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets 42,051,503 255,534,609 58,877,883
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payables:
Investment securities purchased 11,129,422 -- 6,076,685
Forward foreign currency exchange contracts -- 1,816,332 --
Fund shares repurchased 14,381 124,500 128,184
Investment adviser fees 6,423 94,713 18,124
Administration fees -- 32,334 6,857
Authorized dealer service fees 6,166 44,409 9,224
Distribution fees 151 35,488 154
Accrued expenses and other liabilities 57,538 211,388 116,255
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 11,214,081 2,359,164 6,355,483
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets:
Paid in capital 30,678,648 247,410,169 52,495,830
Accumulated undistributed net investment income 53,331 6,704,225 60,331
Accumulated net realized loss on investment transactions (45,759) (4,636,687) (1,024,890)
Accumulated net realized foreign currency gain -- 43,634 --
Net unrealized gain on investments and futures 151,202 4,864,862 991,129
Net unrealized loss on translation of assets and liabilities denominated in foreign
currencies -- (1,210,758) --
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets $30,837,422 $253,175,445 $52,522,400
==================================================================================================================================
Net asset value, offering /(a)/ and redemption price per share
Class A $14.36 $14.53 $14.37
Class B $14.37 $14.53 $14.37
Institutional -- $14.52 --
==================================================================================================================================
Shares Outstanding
Class A 2,131,467 13,670,270 3,637,437
Class B 16,317 17,603 17,778
Institutional -- 3,735,251 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total shares outstanding, $.001 par value (unlimited number of shares authorized) 2,147,784 17,423,124 3,655,215
==================================================================================================================================
</TABLE>
/(a)/Maximum public offering price per share (NAV per share x 1.0471) for Class
A shares is $15.04, $15.21 and $15.05 for Government Income, Global Income
and Municipal Income, respectively. At redemption, Class B shares are
subject to a contingent deferred sales charge, assessed on the amount equal
to the lesser of the current net asset value or the original purchase price
of the shares.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Trust
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended October 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
======================================
<S> <C> <C> <C>
Investment income:
Interest/(a)/ $2,048,891 $18,287,214 $2,869,729
- ------------------------------------------------------------------------------
Total income 2,048,891 18,287,214 2,869,729
- ------------------------------------------------------------------------------
Expenses:
Investment adviser fees 148,120 1,965,605 211,283
Administration fees 44,433 393,263 79,231
Authorized dealer service fees 74,171 549,289 132,051
Distribution fees 74,281 549,538 132,304
Custodian fees 44,987 210,420 36,172
Transfer agent fees 72,237 121,212 90,284
Professional fees 58,897 92,538 60,094
Registration fees 14,992 63,673 32,549
Amortization of deferred organization
expenses 18,848 46,256 17,593
Trustee fees 478 3,073 707
Other 8,763 78,430 27,214
- ------------------------------------------------------------------------------
Total expenses 560,207 4,073,297 819,482
Less--expenses reimbursable and fees
waived by Goldman Sachs (411,644) (1,241,452) (370,128)
- ------------------------------------------------------------------------------
Net expenses 148,563 2,831,845 449,354
- ------------------------------------------------------------------------------
Net investment income 1,900,328 15,455,369 2,420,375
- ------------------------------------------------------------------------------
Realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions:
Net realized gain (loss) from:
Investment transactions 115,970 9,268,666 1,390,846
Futures transactions (68,389) -- (151,156)
Foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on:
Investments and options (332,205) 54,149 (513,085)
Futures 74,600 -- --
Translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investment, options, futures and
foreign currency transactions (210,024) 12,079,256 726,605
- ------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $1,690,304 $27,534,625 $3,146,980
==============================================================================
</TABLE>
/(a)/Net of $96,252 in foreign withholding tax for the Global Income
Fund.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,900,328 $ 15,455,369 $ 2,420,375
Net realized gain from investment transactions 47,581 9,268,666 1,239,690
Net realized loss from foreign currency related transactions -- (2,192,328) --
Net change in unrealized gain (loss) on investments, futures and options (257,605) 54,149 (513,085)
Net change in unrealized loss on translation of assets and liabilities
denominated in foreign currencies -- 4,948,769 --
- ------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,690,304 27,534,625 3,146,980
- ------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
Class A (1,898,372) (22,455,377) (2,418,570)
Class B (3,324) (3,052) (1,805)
Institutional Class -- (4,050,770) --
- ------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,901,696) (26,509,199) (2,420,375)
- ------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 8,922,548 39,747,372 6,389,765
Reinvestment of dividends and distributions 1,614,587 16,968,046 1,484,778
Cost of shares repurchased (8,990,920) (82,019,748) (9,875,982)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 1,546,215 (25,304,330) (2,001,439)
- ------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 1,334,823 (24,278,904) (1,274,834)
Net assets:
Beginning of year 29,502,599 277,454,349 53,797,234
- ------------------------------------------------------------------------------------------------------------------------
End of year $ 30,837,422 $ 253,175,445 $ 52,522,400
========================================================================================================================
Accumulated undistributed net investment income $ 53,331 $ 6,704,225 $ 60,331
========================================================================================================================
Summary of share transactions:
Shares sold 624,626 2,811,314 449,496
Reinvestment of dividends and distributions 112,977 1,198,568 104,201
Shares repurchased (628,175) (5,784,097) (694,794)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 109,428 (1,774,215) (141,097)
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended October 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Government Global Municipal
Income Income Income
Fund Fund Fund
=============================================
<S> <C> <C> <C>
From operations:
Net investment income $ 1,357,262 $ 19,658,884 $ 2,466,930
Net realized gain from investment transactions 603,048 5,556,002 938,332
Net realized gain from foreign currency related transactions -- 18,804,029 --
Net change in unrealized gain on investments 902,391 14,759,004 3,055,111
Net change in unrealized loss on translation of assets and liabilities denominated in
foreign currencies -- (15,288,240) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 2,862,701 43,489,679 6,460,373
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income (1,361,620) (20,883,123)(a) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (1,361,620) (20,883,123) (2,466,930)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions:
Net proceeds from sales of shares 15,973,014 53,349,100 11,879,853
Reinvestment of dividends and distributions 1,123,498 13,008,610 1,551,121
Cost of shares repurchased (3,546,816) (208,094,050) (11,000,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions 13,549,696 (141,736,340) 2,430,764
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) 15,050,777 (119,129,784) 6,424,207
Net assets:
Beginning of year 14,451,822 396,584,133 47,373,027
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $29,502,599 $ 277,454,349 $ 53,797,234
====================================================================================================================================
Accumulated undistributed net investment income $ 36,251 $ 16,641,827 $ 42,738
====================================================================================================================================
Summary of share transactions:
Shares sold 1,139,008 3,822,903 876,447
Reinvestment of dividends and distributions 80,152 935,191 113,767
Shares repurchased (253,583) (15,079,626) (816,569)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in shares outstanding 965,577 (10,321,532) 173,645
====================================================================================================================================
</TABLE>
(a) The Global Income Fund distributed $20,322,640 and $560,483 from net
investment income for the Class A and Institutional class of shares,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements
October 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Trust (the "Trust") is a Massachusetts business trust registered
under the Investment Company Act of 1940 (as amended) as an open-end, management
investment company. Included in this report are the financial statements for the
Goldman Sachs Government Income Fund (Government Income), the Goldman Sachs
Global Income Fund (Global Income) and the Goldman Sachs Municipal Income Fund
(Municipal Income), collectively, "the Funds" or individually a "Fund."
Government Income and Municipal Income are diversified portfolios whereas Global
Income is a non-diversified portfolio. As of October 31, 1996, the Funds offer
Class A and Class B shares. In addition, Global Income offers Institutional and
Service shares. As of October 31, 1996, there outstanding no Service shares.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds which are in conformity with those generally accepted in
the investment company industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts.
A. Investment Valuation
- -----------------------
Investments in debt securities, other than money market instruments, held by the
Funds are valued on the basis of dealer-supplied quotations or by a pricing
service approved by the Board of Trustees if such prices are believed by the
investment adviser to accurately represent market value. The prices derived by a
pricing agent reflect broker/dealer-supplied valuations and electronic data
processing techniques. If those prices are not deemed by the Fund's Investment
Adviser to be representative of the market values at the time the net asset
value is calculated, then such securities will be valued at fair value as
described below. Options and futures contracts are valued at the last sale price
on the market where any such option or futures contract is principally traded.
Forward foreign currency exchange contracts are valued at the mean between the
last bid and asked quotations supplied by a dealer in such contracts. All other
securities and other assets, including debt securities, for which prices are
supplied by a pricing agent but are not deemed by the Fund's Investment Adviser
to be representative of market values, restricted securities and securities for
which no market quotation is available, but excluding money market instruments
with a remaining maturity of sixty days or less, are valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Trustees. Money market instruments held by the Fund with a remaining maturity of
sixty days or less will be valued by the amortized cost method, which
approximates market value.
Investments in portfolio securities held by Government Income and Municipal
Income for which accurate market quotations are readily available are valued on
the basis of quotations furnished by a pricing service or provided by dealers in
such securities. Portfolio securities held by Government Income and Municipal
Income, for which accurate market quotations are not readily available are
valued at fair value using methods determined in good faith under procedures
established by the Trust's Board of Trustees and may include yield equivalents
or a pricing matrix. Exchange traded options and futures contracts will be
valued by the investment adviser at the last sale price on the exchange where
such contracts and options are principally traded. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
B. Security Transactions and Investment Income
- ----------------------------------------------
Security transactions are recorded on the trade date. Realized gains and losses
on sales of portfolio securities are calculated on the identified cost basis.
Interest income is recorded on the basis of interest accrued. Premiums on
interest-only securities and on collateralized mortgage obligations with nominal
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
principal amounts are amortized, on an effective yield basis, over the expected
lives of the respective securities, taking into account principal prepayment
experience and estimates of future principal prepayments. Certain mortgage
security paydown gains and losses are taxable as ordinary income. Such paydown
gains and losses increase or decrease taxable ordinary income available for
distribution and are classified as interest income in the accompanying
Statements of Operations. Original issue discounts ("OID") on debt securities
are amortized to interest income over the life of the security with a
corresponding increase in the cost basis of that security. OID amortization on
mortgage backed REMIC securities is initially recorded based on estimates of
principal paydowns using the most recent OID factors available from the issuer.
Recorded amortization amounts are adjusted when actual OID factors are received.
For Municipal Income, market premiums on other long-term debt securities are
amortized to interest income while for Global Income, market discounts on other
long-term debt securities are accreted to interest income.
C. Foreign Currency Translations
- --------------------------------
Amounts denominated in foreign currencies are translated into U.S. dollars on
the following basis: (i) investment valuations, other assets and liabilities
initially expressed in foreign currencies are converted each business day into
U.S. dollars based upon current exchange rates; (ii) purchases and sales of
foreign investments, income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Net realized and unrealized gain (loss) on foreign currency transactions will
represent: (i) foreign exchange gains and losses from the sale and holdings of
foreign currencies and investments; (ii) gains and losses between trade date and
settlement date on investment securities transactions and forward exchange
contracts; and (iii) gains and losses from the difference between amounts of
interest recorded and the amounts actually received.
D. Forward Foreign Currency Exchange Contracts
- ----------------------------------------------
Global Income may enter into forward foreign exchange contracts for the purchase
or sale of a specific foreign currency at a fixed price on a future date as a
hedge or cross-hedge against either specific transactions or portfolio
positions. Global Income may also purchase and sell forward contracts to seek to
increase total return. All commitments are "marked-to-market" daily at the
applicable translation rates and any resulting unrealized gains or losses are
recorded in the Fund's financial statements. The Fund records realized gains or
losses at the time the forward contract is offset by entry into a closing
transaction or extinguished by delivery of the currency. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar.
E. Mortgage Dollar Rolls
- ------------------------
Government Income and Global Income may enter into mortgage "dollar rolls" in
which the Fund sells securities in the current month for delivery and
simultaneously contracts with the same counterparty to repurchase similar (same
type, coupon and maturity) but not identical securities on a specified future
date. The Fund loses the right to receive principal and interest paid on the
securities sold but benefits to the extent of any price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. The Fund will hold and maintain in a segregated account, until the
settlement date, cash or liquid, high grade debt securities in an amount equal
to the forward purchase price. For financial reporting and tax reporting
purposes, the Fund treats mortgage dollar rolls as two separate transactions;
one involving the purchase of a security and a separate transaction involving a
sale.
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
F. Option Accounting Principles
- -------------------------------
When call or put options are written, an amount equal to the premium received is
recorded as an asset and as an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a written option expires on its stipulated expiration date,
or a closing purchase transaction has been entered into, a gain or loss is
realized without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is extinguished.
Upon the purchase of a call option or a protective put option, the premium paid
is recorded as an investment, and subsequently marked-to-market to reflect the
current market value of the option. If an option which has been purchased
expires on the stipulated expiration date, a loss is realized in the amount of
the cost of the option. If a closing sale transaction has been entered into, a
gain or loss is realized, depending on whether the sale proceeds from the
closing sale transaction are greater or less than the cost of the option.
G. Futures Contracts
- --------------------
The Funds may enter into futures transactions in order to hedge against changes
in interest rates, securities prices, currency exchange rates in the case of
Global Income or to seek to increase total return. A Fund will engage in futures
transactions only for bona fide hedging purposes as defined in regulations of
the CFTC or to seek to increase total return to the extent permitted by such
regulations. The use of futures contracts involve, to varying degrees, elements
of market risk which may exceed the amounts recognized in the Statements of
Assets and Liabilities.
Payments for futures contracts ("variation margin") are made or received by the
Funds each day, dependent on the daily fluctuations in the value of the
contract, and are recorded for financial reporting purposes, as unrealized gains
or losses. When entering into a closing transaction, the Funds will realize a
gain or loss equal to the difference between the value of the futures contract
to sell and the futures contract to buy. Futures contracts are valued at the
most recent settlement price, unless such price does not reflect the fair market
value of the contract, in which case the position will be valued using methods
as approved by the Funds' Board of Trustees.
Certain risks may arise upon entering into futures contracts. The predominant
risk is that changes in the value of the futures contract that may not directly
correlate with changes in the value of the underlying securities. The risk may
decrease the effectiveness of the Funds' hedging strategies and may also result
in a loss to the Funds.
H. Federal Taxes
- ----------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company tax-exempt and taxable income to its
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial reporting
purposes is determined in accordance with income tax rules. Therefore, the
source of a portfolio's distributions may be shown in the accompanying financial
statements as either from or in excess of net investment income or net realized
gain on investment transactions, or from paid-in capital, depending on the type
of book/tax differences that may exist.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At October 31, 1996, the Funds had approximately the following amounts of
capital loss carryforward for U.S. Federal tax purposes:
<TABLE>
<CAPTION>
Year of
Fund Amount Expiration
- ----------------------------------- ------------ ----------------
<S> <C> <C>
Global Income $4,471,734 2002
Municipal Income $1,534,884 2002
</TABLE>
I. Deferred Organization Expenses
- ---------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
J. Expenses
- -----------
Expenses incurred by the Trust that do not specifically relate to an individual
portfolio of the Trust are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Class A and Class B shareholders of the Funds bear all expenses and fees
relating to their respective distribution and authorized dealer service plans as
well as other expenses which are directly attributable to such shares. Transfer
agent fees are subject to separate arrangements for each class.
3. Agreements
- -------------
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as each Fund's investment adviser
pursuant to Investment Advisory Agreements. Goldman Sachs Asset Management
International ("GSAM International"), an affiliate of Goldman Sachs, acts as
subadviser under a Subadvisory Agreement for Global Income. Under the Investment
Advisory and Subadvisory Agreements, GSAM and GSAM International, subject to the
general supervision of the Trust's Board of Trustees, manage the Funds'
portfolios. As compensation for the services rendered pursuant to the Investment
Advisory Agreements and the assumption of the expenses related thereto, GSAM is
entitled to a fee, computed daily and payable monthly at an annual rate equal to
.50%, .25% and .40% of average daily net assets of Government Income, Global
Income and Municipal Income, respectively. As compensation for the services
rendered pursuant to the Subadvisory Agreement, GSAM International is entitled
to a subadvisory fee from Global Income of .50% of the average daily net assets.
GSAM serves as each Fund's administrator pursuant to an Administration
Agreement. Under the Administration Agreement, GSAM administers the Funds'
business affairs, including providing facilities. As compensation for the
services rendered pursuant to the Administration Agreement, GSAM is entitled to
a fee, computed daily and payable monthly at an annual rate equal to .15% of
each Fund's average daily net assets.
GSAM has voluntarily agreed to limit certain of the Funds' expenses (excluding
advisory, administration, distribution and authorized dealer service fees,
taxes, interest, brokerage, litigation, indemnification and other extraordinary
expenses and with respect to Global Income, transfer agent fees) to the extent
such expenses exceed .00%, .06% and .05% per annum of Government Income, Global
Income and Municipal Income, respectively.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and as such may receive a portion of the sales load
imposed on the sale of Fund shares. During the year ended October 31, 1996,
Goldman Sachs retained approximately $17,300, $52,600 and $24,900 of sales loads
related to Government Income, Global Income and Municipal Income, respectively.
The Trust, on behalf of each Fund, has adopted a Distribution Plan (the
"Distribution Plan") pursuant to Rule 12b-1. Under the Distribution Plan,
Goldman Sachs is entitled to a quarterly fee from each Fund for distribution
services equal, on an annual basis, to .25% and .75% of each Fund's average
daily net assets attributable to Class A and Class B shares, respectively.
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, has adopted an Authorized Dealer Service Plan
(the "Service Plan") pursuant to which Goldman Sachs and Authorized Dealers are
compensated for providing personal and account maintenance services. Each Fund
pays a fee under its Service Plan equal, on an annual basis, up to .25% of the
average daily net assets attributable to the Class A and Class B shares. Goldman
Sachs also serves as the Transfer Agent of the Funds for a fee.
For the year ended October 31, 1996, the advisors, administrators and
distributor have voluntarily agreed to waive certain fees and reimburse other
expenses as follows (in thousands):
<TABLE>
<CAPTION>
Waivers
--------------------------------------
Reimburse-
Admin- Class A Reimburse- ment
Fund Advisor istrator 12b-1 ment Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Government
Income 74 44 74 220 27
Global
Income 848 -- 56 337 7
Municipal
Income -- -- 132 238 30
</TABLE>
The Investment Advisors and Administrator may discontinue or modify such waivers
and limitations in the future at their discretion.
For the year ended October 31, 1996, Government Income and Municipal Income
incurred commissions expense of approximately $1,200 and $2,750 respectively, in
connection with futures contracts entered into with Goldman Sachs. At October
31, 1996, Goldman Sachs owes approximately $7,000 to Government Income related
to variation margin on futures contracts.
4. Line of Credit Facility
The Funds participate in a $100,000,000 uncommitted, unsecured revolving line of
credit facility. In addition, Global Income participates in a $50,000,000
committed, unsecured revolving line of credit facility. Both facilities are to
be used solely for temporary or emergency purposes. Under the most restrictive
arrangement, each Fund must own securities having a market value in excess of
300% of the total bank borrowings. The interest rate on borrowings is based on
the federal funds rate. The committed facility also requires a fee to be paid
based on the amount of the commitment which has not been utilized. For the year
ended October 31, 1996, the Funds did not have any borrowings under these
facilities.
5. Investment Transactions
Purchases and proceeds of sales or maturities of long-term securities for the
year ended October 31, 1996, were as follows:
<TABLE>
<CAPTION>
================================================================================
Government Global Municipal
Fund Income Income Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchases of U.S.
Government and
agency obligations $133,097,699 $117,740,548 $ --
- --------------------------------------------------------------------------------
Purchases (excluding
U.S. Government and
agency obligations) 9,741,716 410,144,747 184,788,273
- --------------------------------------------------------------------------------
Sales or maturities of
U.S. Government and
agency obligations 136,922,990 102,151,633 --
- --------------------------------------------------------------------------------
Sales or maturities
(excluding U.S.
Government and
agency obligations) 3,909,735 446,269,068 189,391,870
================================================================================
</TABLE>
For the year ended October 31, 1996, option transactions in Global Income were
as follows:
<TABLE>
<CAPTION>
Options Purchased Cost
- --------------------------------------------------------------------------------
<S> <C>
Balance outstanding, beginning of period $ --
Options purchased 202,160
Options expired (202,160)
- --------------------------------------------------------------------------------
Balance outstanding, end of period $ --
================================================================================
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
At October 31, 1996, Global Income had outstanding forward foreign currency
exchange contracts to sell foreign currencies as follows:
<TABLE>
<CAPTION>
===============================================================================
Value on
Foreign Currency Settlement Current Unrealized
Sale Contracts Date Value Gain/(Loss)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Danish Krone
Expiring 1/22/97 $ 6,348,652 $ 6,443,676 $ (95,024)
Deutschemark
Expiring 11/27/96 37,735,809 38,044,516 (308,707)
Expiring 2/27/97 12,671,000 12,775,513 (104,513)
British Pound Sterling
Expiring 11/14/96 15,423,575 16,184,359 (760,784)
Irish Pound
Expiring 1/8/97 6,842,743 6,964,425 (121,682)
Italian Lira
Expiring 1/29/97 1,326,853 1,335,737 (8,884)
Japanese Yen
Expiring 1/24/97 23,059,781 22,755,697 304,084
Netherlands Guilder
Expiring 1/9/97 6,442,727 6,510,658 (67,931)
Spanish Peseta
Expiring 1/16/97 6,543,897 6,612,046 (68,149)
Swedish Krona
Expiring 1/28/97 4,708,899 4,736,457 (27,558)
Swiss Franc
Expiring 1/29/97 12,952,107 12,453,735 498,372
Expiring 1/29/97 12,083,214 12,109,196 (25,982)
- -------------------------------------------------------------------------------
Total Foreign Currency
Sale Contracts $146,139,257 $146,926,015 $(786,758)
===============================================================================
</TABLE>
The contractual amounts of forward foreign currency exchange contracts do not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
At October 31, 1996, Global Income had sufficient cash and/or securities to
cover any commitments under these contracts.
Global Income has recorded a "Receivable for forward foreign currency exchange
contracts" and "Payable for forward foreign currency exchange contracts"
resulting from open and closed but not settled forward foreign currency exchange
contracts of $1,073,237 and $1,816,332 respectively, in the accompanying
Statement of Assets and Liabilities. Included in the "Receivable and Payable for
forward foreign currency exchange contracts" are $270,781 and $227,118
respectively, related to forward contracts closed but not settled as of
October 31, 1996.
6. Summary of Share Transactions
Share activity for the year ended October 31, 1996 is as follows:
<TABLE>
<CAPTION>
Government Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $8,675,868 607,156
Reinvestment of dividends and
distributions 1,611,387 112,752
Shares repurchased (8,971,389) (626,797)
----------------------------------
1,315,866 93,111
----------------------------------
Class B Shares
Shares sold 246,680 17,470
Reinvestment of dividends
and distributions 3,200 225
Shares repurchased (19,531) (1,378)
----------------------------------
230,349 16,317
- -------------------------------------------------------------------------------
$1,546,215 109,428
===============================================================================
<CAPTION>
Global Income Fund Dollars Shares
===============================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 15,545,777 1,089,521
Reinvestment of dividends
and distributions 13,419,614 947,846
Shares repurchased (76,216,894) (5,376,065)
----------------------------------
(47,251,503) (3,338,698)
----------------------------------
Class B Shares
Shares sold 265,053 18,628
Reinvestment of dividends
and distributions 1,708 119
Shares repurchased (16,373) (1,144)
----------------------------------
250,388 17,603
----------------------------------
Institutional Shares:
Shares sold 23,936,542 1,703,165
Reinvestment of dividends
and distributions 3,546,724 250,603
Shares repurchased (5,786,481) (406,888)
----------------------------------
21,696,785 1,546,880
- -------------------------------------------------------------------------------
$(25,304,330) (1,774,215)
================================================================================
</TABLE>
33
<PAGE>
Goldman Sachs Trust
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
October 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Municipal Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 6,139,212 431,736
Reinvestment of dividends
and distributions 1,482,976 104,074
Shares repurchased (9,874,431) (694,685)
------------------------------------
(2,252,243) (158,875)
------------------------------------
Class B Shares
Shares sold 250,553 17,760
Reinvestment of dividends
and distributions 1,802 127
Shares repurchased (1,551) (109)
------------------------------------
250,804 17,778
- --------------------------------------------------------------------------------
$ (2,001,439) (141,097)
================================================================================
</TABLE>
Share activity for the year ended October 31, 1995 is as follows:
<TABLE>
<CAPTION>
Global Income Fund Dollars Shares
================================================================================
<S> <C> <C>
Class A Shares:
Shares sold $ 22,864,336 1,659,380
Reinvestment of dividends
and distributions 12,448,128 895,996
Shares repurchased (207,889,246) (15,065,279)
-----------------------------------
(172,576,782) (12,509,903)
-----------------------------------
Institutional Shares:
Shares sold 30,484,764 2,163,523
Reinvestment of dividends
and distributions 560,482 39,195
Shares repurchased (204,804) (14,347)
-----------------------------------
30,840,442 2,188,371
- -------------------------------------------------------------------------------
$(141,736,340) (10,321,532)
===============================================================================
</TABLE>
7. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping in the customer-only account of State Street
Bank & Trust Co., the Funds' custodian, or at subcustodians. GSAM monitors the
market value of the underlying securities by pricing them daily.
8. Joint Repurchase Agreement Account
Government Income, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, transfers uninvested cash
balances into a joint account, the daily aggregate balance of which is invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations and mortgage-related
securities issued by the U.S. Government, its agencies or instrumentalities. As
of October 31, 1996, Government Income had a 0.3% undivided interest in the
repurchase agreement in the joint account which equaled $8,400,000 in principal
amount. As of October 31, 1996, the repurchase agreements in the joint account
along with the corresponding underlying securities (including the type of
security, market value, interest rate and maturity date) were as follows:
<TABLE>
<CAPTION>
Principal Interest Maturity Amortized
Amount Rate Date Cost
===============================================================================
<S> <C> <C> <C>
Bear Stearns & Co., dated 10/31/96, repurchase price $700,108,500 (FNMA:
$555,686,102, 5.50%-8.50%, 2/1/09-6/1/26; FHLMC: $166,359,033, 5.50%-8.50%,
9/1/98-8/1/26)
$700,000,000 5.58% 11/01/96 $700,000,000
Lehman Brothers, Inc. dated 10/31/96, repurchase price $924,843,329 (Treasury
Notes: $942,903,967, 4.38%-8.50%, 11/15/96-8/15/03)
924,700,00 5.58 11/01/96 924,700,000
Nomura Securities International, Inc. dated 10/31/96, repurchase price
$700,108,500 (FNMA: $256,658,433, 5.50%-8.00%, 6/1/03-10/1/26; FHLMC:
$465,441,174, 6.00%-9.00%, 9/1/1-10/1/26)
700,000,000 5.58 11/01/96 700,000,000
Smith Barney, Inc. dated 10/31/96, repurchase price $170,026,161 (U.S
Treasury Interest Only Stripped Securities: $11,653,277, 2/15/98-5/15/02; U.S.
Treasury Notes: $85,997,728, 5.25%-7.75%, 5/15/97-10/15/06; U.S. Treasury
Principal Only Stripped Securities: $33,993,571, 5/15/97-5/15/05; U.S.
Treasury Bills: $41,756,285, 12/12/96-3/20/97)
170,000,000 5.54 11/01/96 170,000,000
Union Bank of Switzerland, Inc. dated 10/31/96, repurchase price $175,026,979
(U.S. Treasury Notes: $178,694,649, 6.88%-7.75%, 8/31/99-1/31/00)
175,000,000 5.55 11/01/96 175,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $2,669,700,000
===============================================================================
</TABLE>
34
<PAGE>
- --------------------------------------------------------------------------------
9. Certain Reclassifications
In accordance with Statement of Position 93-2, the Government Income, Global
Income and Municipal Income Funds have reclassified $18,448, $46,256 and
$17,593, respectively, from paid-in capital to accumulated undistributed net
investment income. Additionally, the Global Income Fund has reclassified
$862,007, $207,585 and $380 from accumulated net realized gain, accumulated net
realized foreign currency gain and paid in capital, respectively to accumulated
undistributed net investment income. These reclassifications have no impact on
net asset values of the Funds and are designed to present the Funds' capital
accounts on a tax basis.
10. Other
As of October 31, 1996, the Goldman, Sachs & Co. Employees Profit Sharing and
Retirement Income Plan was the beneficial owner of approximately 14% of the
outstanding shares of Global Income.
- --------------------------------------------------------------------------------
35
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations/(a)/ Distributions to shareholders
============================================================== ========================================
====================================================================================================================================
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
GOVERNMENT INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.47 $0.92 $(0.11) -- $0.81 $(0.92) -- --
1996-Class B shares/(c)/ 14.11 0.41 0.26 -- 0.67 (0.41) -- --
1995-Class A shares 13.47 0.94 1.00 -- 1.94 (0.94) -- --
1994-Class A shares 14.90 0.85 (1.28) -- (0.43) (0.85) (0.12) (0.02)
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 14.32 0.56 0.58 -- 1.14 (0.56) -- --
GLOBAL INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares $14.45 $0.71 $0.62 $0.18 $1.51 $(1.43) -- --
1996-Class B shares/(c)/ 14.03 0.34 0.41 0.11 0.86 (0.36) -- --
1996-Institutional
shares 14.45 1.15 0.32 0.10 1.57 (1.50) -- --
1995-Class A shares 13.43 0.89 0.92 0.15 1.96 (0.94) -- --
1995- Institutional
shares/(f)/ 14.09 0.22 0.34 0.06 0.62 (0.26) -- --
1994-Class A shares 15.07 0.84 (1.37) (0.12) (0.65) (0.22) (0.16) --
1993-Class A shares 14.69 0.85 1.07 (0.42) 1.50 (0.85) (0.27) --
1992-Class A shares 14.60 1.14 0.45 (0.36) 1.23 (1.14) -- --
For the Period August 2, 1991/(d)/ through October 31,
=========================================================
1991-Class A shares 14.55 0.25 0.23 (0.19) 0.29 (0.24) -- --
<CAPTION>
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
- -----------------------------------------------------------------------------------------------------
GOVERNMENT INCOME FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares -- -- $(0.92) $(0.11) $14.36
1996-Class B shares/(c)/ -- -- (0.41) 0.26 14.37
1995-Class A shares -- -- (0.94) 1.00 14.47
1994-Class A shares (0.01) -- (1.00) (1.43) 13.47
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares -- -- (0.56) 0.58 14.90
GLOBAL INCOME FUND
- -----------------------------------------------------------------------------------------------------
For the Years Ended October 31,
===========================================================
1996-Class A shares -- -- $(1.43) $0.08 $14.53
1996-Class B shares/(c)/ -- -- (0.36) 0.50 14.53
1996-Institutional
shares -- -- (1.50) 0.07 14.52
1995-Class A shares -- -- (0.94) 1.02 14.45
1995-Institutional
shares/(f)/ -- -- (0.26) 0.36 14.45
1994-Class A shares -- (0.61) (0.99) (1.64) 13.43
1993-Class A shares -- -- (1.12) 0.38 15.07
1992-Class A shares -- -- (1.14) 0.09 14.69
For the Period August 2, 1991 (d) through October 31,
============================================================
1991-Class A shares -- -- (0.24) 0.05 14.60
<CAPTION>
Ratio of Net
Ratio of net assets
net investment at end
expenses income Portfolio of
Total to average to average turnover period
return /(b/) net assets net assets rate /(h)/ (in 000s)
===================================================================================================
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Years Ended October 31,
=========================================================
1996-Class A shares 5.80% 0.50% 6.42% 485.09% $30,603
1996-Class B shares/(c)/ 4.85/(g)/ 1.25/(e)/ 5.65/(e)/ 485.09 234
1995-Class A shares 14.90 0.47 6.67 449.53 29,503
1994-Class A shares (2.98) 0.11 6.06 654.90 14,452
For the Period February 10, 1993/(d)/ through October 31,
=========================================================
1993-Class A shares 8.03/(g)/ 0.00/(e)/ 4.87/(e)/ 725.41/(g/ 12,860
- ---------------------------------------------------------------------------------------------------
For the Years Ended October 31,
=========================================================
1996-Class A shares 11.05% 1.16% 5.81% 232.15% $198,665
1996-Class B shares/(c)/ 6.24/(g)/ 1.70/(e)/ 5.16/(e)/ 232.15 256
1996-Institutional
shares 11.55 0.65 6.35 232.15 54,254
1995-Class A shares 15.08 1.29 6.23 265.86 245,835
1995-Institutional
shares/(f)/ 4.42/(g)/ 0.65/(e)/ 6.01/(e)/ 265.86 31,619
1994-Class A shares (4.49) 1.28 5.73 343.74 396,584
1993-Class A shares 10.75 1.30 5.78 313.88 675,662
1992-Class A shares 8.77 1.37 7.85 270.75 588,893
For the Period August 2, 1991 (d) through October 31,
=========================================================
1991- Class A shares 2.00 0.38 /(g)/ 1.72 /(g)/ 34.22 /(g)/ 388,744
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
------------------------------
Ratio of
net
Ratio of investment
expenses income
to average to average
net assets net assets
==============================================================
- --------------------------------------------------------------
<S> <C> <C>
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.89% 5.03%
1996-Class B shares/(c)/ 2.39/(e)/ 4 .51/(e)/
1995-Class A shares 2.34 4.80
1994-Class A shares 2.86 3.31
For the Period February 10, 1993 /(d)/ through October 31,
==========================================================
1993-Class A shares 4.00/(e)/ 0.87/(e)/
- ------------------------------------------------------------
For the Years Ended October 31,
==========================================================
1996-Class A shares 1.64% 5.33%
1996-Class B shares/(c)/ 2.14 /(e)/ 4.72/(e)/
1996-Institutional
shares 1.11 5.89
1995-Class A shares 1.58 5.94
1995-Institutional
shares/(f)/ 1.08/(e)/ 5.58/(e)/
1994-Class A shares 1.53 5.48
1993-Class A shares 1.55 5.53
1992-Class A shares 1.62 7.60
For the Period August 2, 1991 (d) through October 31,
==========================================================
1991-Class A shares 0.44/(g)/ 1.66/(g)/
- ------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Trust
- -------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income (loss) from investment operations (a) Distributions to shareholders
-------------------------------------------- -----------------------------------------
Net realized Net realized
and unrealized and unrealized Total From net
gain (loss) gain (loss) income realized gain
Net asset on investment, on foreign (loss) on investment, In excess
value at Net option and currency from From net option and of net
beginning investment futures related investment investment futures investment
of period income transactions transactions operations income transactions income
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $14.17 $0.65 $0.20 -- $0.85 $(0.65) -- --
1996- Class B shares /(c)/ 14.03 0.27 0.34 -- 0.61 (0.27) -- --
1995- Class A shares 13.08 0.67 1.09 -- 1.76 (0.67) -- --
1994- Class A shares 14.64 0.73 (1.51) -- (0.78) (0.73) (0.05) --
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 14.32 0.22 0.32 -- 0.54 (0.22) -- --
<CAPTION>
Distributions to shareholders
----------------------------------------
In excess of
net realized Net
gain on increase
investment, From Total (decrease) Net asset
option and paid distributions in net value at
futures in to asset end of
transactions capital shareholders value period
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares -- -- $(0.65) $0.20 $14.37
1996- Class B shares /(c)/ -- -- (0.27) 0.34 14.37
1995- Class A shares -- -- (0.67) 1.09 14.17
1994- Class A shares -- -- (0.78) (1.56) 13.08
For the Period July 20, 1993
1993- Class A shares -- -- (0.22) 0.32 14.64
<CAPTION>
Ratio of
Ratio of net
net investment
expenses income Portfolio
Total to average to average turnover
return /(b/) net assets net assets rate /(h)/
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares 6.13% 0.85% 4.58% 344.13%
1996- Class B shares /(c)/ 4.40 /(g)/ 1.60 /(e)/ 3.55 /(e)/ 344.13
1995- Class A shares 13.79 0.76 4.93 335.55
1994- Class A shares (5.51) 0.45 5.28 357.54
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 3.73 /(g)/ 0.00 /(e)/ 5.15 /(e)/ 99.99 /(g)/
<CAPTION>
Ratios assuming
no voluntary waiver
of fees or
expense limitations
---------------------
Net Ratio of
assets net
at end Ratio of investment
of expenses income
period to average to average
(in 000s) net assets net assets
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
MUNICIPAL INCOME FUND
For the Years Ended October 31,
1996- Class A shares $52,267 1.55% 3.88%
1996- Class B shares /(c)/ 255 2.05 /(e)/ 3.10 /(e)/
1995- Class A shares 53,797 1.49 4.20
1994- Class A shares 47,373 1.55 4.18
For the Period July 20, 1993 (d) through October 31,
1993- Class A shares 30,166 2.42 /(e)/ 2.73 /(e)/
</TABLE>
- ---------------
(a) Includes the balancing effect of calculating per share amounts.
(b) Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions, a complete redemption of the investment
at the net asset value at the end of period and no sales charge. Total
return would be reduced if a sales charge for Class A shares or a contingent
deferred sales charge for Class B shares were taken into account.
(c) Class B shares commenced operations on May 1, 1996.
(d) Commencement of operations.
(e) Annualized.
(f) Institutional shares commenced operations on June 1, 1995.
(g) Not annualized.
(h) Includes the effect of mortgage dollar roll transactions for the Government
Income Fund.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Government Income
Fund, Goldman Sachs Global Income Fund and Goldman Sachs Municipal Income Fund:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund (portfolios of Goldman Sachs Trust, a
Massachusetts Business Trust), including the statements of investments, as of
October 31, 1996, and the related statements of operations, the statements of
changes in net assets and the financial highlights for each of the periods
presented. These financial statements and the financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of the
Goldman Sachs Government Income Fund, Goldman Sachs Global Income Fund and
Goldman Sachs Municipal Income Fund as of October 31, 1996, the results of their
operations and the changes in their net assets and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
December 12, 1996
- --------------------------------------------------------------------------------
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Trust Prospectus which contains
facts concerning the Fund's objectives and policies, management, expenses and
other information.
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Douglas C. Grip
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
The Goldman Sachs
Fixed Income Funds
- -------------------------
Annual Report
October 31, 1996
Goldman Sachs Government Income Fund
Goldman Sachs Global Income Fund
Goldman Sachs Municipal Income Fund
[GOLDMAN SACHS LOGO APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
times over the future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
3-A
<PAGE>
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
4-A
<PAGE>
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by
5-A
<PAGE>
Standard & Poor's is described as having a strong degree of safety regarding
timely payment.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
6-A
<PAGE>
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating
7-A
<PAGE>
category. Plus and minus signs, however, are not used in the AAA, DDD, DD, or D
Categories.
Investment Grade Short-Term Ratings
- -----------------------------------
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these
securities to be rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent
payment default.
LOC: The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
8-A
<PAGE>
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong.
Risk is modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-: Protection factors are average but adequate. However,
risk factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still
considered sufficient for prudent investment. Considerable variability in risk
during economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet
obligations when due. Present or prospective financial protection factors
fluctuate according to industry conditions or company fortunes. Overall quality
may move up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that
obligations will not be met when due. Financial protection factors will
fluctuate widely according to economic cycles, industry conditions and/or
company fortunes. Potential exists for frequent changes in the rating within
this category or into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal, interest or preferred
dividends. Protection factors are narrow and risk can be substantial with
unfavorable economic/industry conditions, and/or with unfavorable company
developments.
DD: Defaulted debt obligations. Issuer failed
to meet scheduled principal and/or interest payment.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and safety
is just below risk-free U.S. Treasury short-term obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
9-A
<PAGE>
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk
factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets
is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors qualify
issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to
the risks of lower-rated bonds. The Fund is dependent on the
Investment Adviser's judgment, analysis and experience in the
evaluation of such bonds.
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of State and Municipal Notes
---------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG"). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
10-A
<PAGE>
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- - Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3: Speculative capacity to pay principal and interest.
11-A
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO . While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
1-B
<PAGE>
GOLDMAN, SACHS & CO.'S INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities firm
with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms, with
partners' capital of approximately $5.3 billion as of November 29, 1996.
. Thirty-four offices worldwide where professionals focus on identifying
financial opportunities.
. The number one underwriter of all international equity issues for 1993,
1994 and 1995.*
. Premier lead manager of negotiated municipal bond offerings over the past
six years (1990-1995).
. The number one lead manager of U.S. common stock offerings from (1989-
1995).*
* Source: Securities Data Corporation. Ranking excludes REITS, Trusts and
-----------------------------------
Rights.
2-B
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Provides advisory services for the largest privatization in the region
of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
3-B
<PAGE>
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 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 Units of:
Prime Obligations Portfolio;
Money Market Portfolio;
Treasury Obligations Portfolio;
Treasury Instruments Portfolio;
Government Portfolio;
Federal Portfolio;
Tax-Exempt Diversified Portfolio;
Tax-Exempt California Portfolio; and
Tax-Exempt New York Portfolio (individually, a "Portfolio" and collectively
the "Portfolios").
Goldman Sachs Asset Management ("GSAM" or the "Adviser"), a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as the
Portfolios' investment adviser. Goldman Sachs serves as distributor and
transfer agent to the Portfolios.
The Goldman Sachs Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which
reflects the priority that Goldman Sachs places on serving clients' interests.
As Goldman Sachs clients, 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 personal computer
<PAGE>
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.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices
of the Portfolios.................... 4
Investment Limitations................. 43
Trustees and Officers.................. 46
The Adviser, Distributor and Transfer
Agent.................................. 52
Portfolio Transactions................. 58
Net Asset Value........................ 60
Redemptions............................ 62
Calculation of Yield Quotations........ 62
Tax Information........................ 67
Organization and Capitalization........ 73
Custodian and Subcustodian............. 79
Independent Accountants................ 79
Financial Statements................... 79
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 specific merchandise, which
are "accepted" by a bank, meaning, in
4
<PAGE>
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
The Prime Obligations Portfolio and Money Market Portfolio may invest
in short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity date and may have either a
fixed or variable interest rate that is based on an index and guaranteed for a
set time period. Because there is no secondary market for these investments,
any such funding agreement purchased by a Portfolio will be regarded as
illiquid.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may
enter into repurchase agreements only with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios'
custodian or subcustodian. The repurchase price may be higher than the purchase
price, the difference being income to the Portfolio, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Obligation
subject to the repurchase agreement.
Repurchase agreements pose certain risks for all entities, including
the Portfolios, that utilize them. Such risks are not unique to the Portfolios
but are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by, among others, the means indicated below, but because of the inherent
legal
5
<PAGE>
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally, for tax purposes, a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller.
If in the event of bankruptcy or insolvency proceedings against the
seller of the Obligation, a court holds that the Portfolio does not have a
perfected security interest in the Obligation, the Portfolio may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Portfolio would be at risk
of losing some or all of the principal and income involved in the transaction.
To minimize this risk, the Portfolios utilize custodians and subcustodians that
the Adviser believes follow 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, each Portfolio (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advisory
agreements with the Adviser or any of its affiliates, may transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
The Money Market Portfolio may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios may also
invest in municipal instruments backed by letters of credit issued by certain of
such banks. Under current Securities and Exchange Commission ("SEC") rules
relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
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 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
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these and other types of asset-backed securities that may be developed in the
future. This Statement of Additional Information will be amended or supplemented
as necessary to reflect the Prime Obligations and Money Market Portfolios'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, a Portfolio will generally not invest in an asset-backed security if
the income received with respect to its investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments in response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-
backed securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default
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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 trans-actions are negotiated directly
with the other party, and such commitments are not traded on exchanges, but may
be traded over-the-counter.
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or negotiate a commitment after entering into it. A
Portfolio also may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. The Portfolio
may realize a capital gain or loss in connection with these transactions;
distributions from any net capital gains would be taxable to its unitholders.
For purposes of determining a Portfolio's average dollar weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio's custodian or subcustodian will maintain in a
segregated account cash or liquid assets having a value (determined daily) at
least equal to the amount of the Portfolio's purchase commitments. In the case
of a forward
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commitment to sell portfolio securities subject to such commitment, the
custodian or subcustodian will hold the portfolio securities in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Portfolio will maintain sufficient assets at all times to cover
its obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable amount master demand
notes. These obligations permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. Variable amount master demand notes are direct
lending arrangements between the lender and borrower and are not generally
transferable, nor are they ordinarily rated. A Portfolio may invest in them
only if the Adviser believes that the notes are of comparable quality to the
other obligations in which that Portfolio may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable and floating rate demand
instruments that are tax exempt municipal obligations or other debt securities
that possess a floating or variable interest rate adjustment formula. These
instruments permit a Portfolio to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Portfolio may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days' notice. Still others are automatically called by the
issuer unless the Portfolio instructs otherwise. The Trust, on behalf of the
Portfolios, intends to exercise the demand only (1) upon a default under the
terms of the debt security, (2) as needed to provide liquidity to a Portfolio,
(3) to maintain the respective quality standards of a Portfolio's investment
portfolio, or (4) to attain a more optimal portfolio structure. A Portfolio
will determine the variable or floating rate demand instruments that it will
purchase in accordance with procedures approved by the Trustees to minimize
credit risks. To be eligible for purchase by a Portfolio, a variable or
floating rate demand instrument which is unrated must have high quality
characteristics similar to other obligations in
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which the Portfolio may invest. The Adviser may determine that an unrated
variable or floating rate demand instrument meets a Portfolio's quality criteria
by reason of being backed by a letter of credit or guarantee issued by a bank
that meets the quality criteria for the Portfolio. Thus, either the credit of
the issuer of the obligation or the guarantor bank or both will meet the quality
standards of the Portfolio.
The maturity of the variable or floating rate demand instruments held
by a Portfolio will ordinarily be deemed to be the longer of (1) the notice
period required before the Portfolio is entitled to receive payment of the
principal amount of the instrument or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Portfolio must also meet the requirements of
rules issued by the SEC applicable to the use of the amortized cost method of
securities valuation. The Portfolios will also consider the liquidity of the
market for variable and floating rate instruments, and in the event that such
instruments are illiquid, the Portfolios' investments in such instruments will
be subject to the limitation on illiquid investments.
A Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Government Portfolio and Federal Portfolio) may invest in
participation interests in variable or floating rate tax-exempt obligations held
by financial institutions (usually commercial banks). Such participation
interests provide the Portfolio with a specific undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of day's notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Portfolio may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 (the "1933 Act"),
including restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act. However, a Portfolio
will not invest more than 10% of the value of its net assets in securities which
are illiquid, which includes fixed time deposits and repurchase agreements
maturing in more than seven days that cannot be traded on a secondary market and
restricted securities, unless, in the case of restricted securities, the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the
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determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue 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 Portfolios which invest in municipal obligations may also acquire
securities in the form of custodial receipts which evidence ownership of future
interest payments, principal payments or both on certain state and local
governmental and authority obligations when, in the opinion of bond counsel,
interest payments with respect to such custodial receipts are excluded from
gross income for federal income tax purposes, and in the case of the Tax-Exempt
California and Tax-Exempt New York Portfolios, exempt from California and New
York (city and state) personal income taxes, respectively. Such obligations are
held in custody by a bank on behalf of the holders of the receipts. These
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custodial receipts are known by various names, including "Municipal Receipts"
("MRs") and "Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-
CATS"). There are a number of other types of notes issued for different
purposes and secured differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital
needs and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security
including partially or fully insured, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. In
addition to a debt service reserve fund, some authorities provide further
security in the form of a state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Lease rental revenue bonds
issued by a state or local authority for capital projects are secured by annual
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations.
Private activity bonds (a term that includes certain types of bonds
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
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Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Portfolios may purchase are limited to short-
term serial bonds---those with original or remaining maturities of thirteen
months or less. The Portfolios may purchase long-term bonds provided that they
have a remaining maturity of thirteen months or less or, in the case of bonds
called for redemption, the date on which the redemption payment must be made is
within thirteen months. The Portfolios may also purchase long-term bonds
(sometimes referred to as "Put Bonds"), which are subject to a Portfolio's
commitment to put the bond back to the issuer at par at a designated time within
thirteen months and the issuer's commitment to so purchase the bond at such
price and time.
The Portfolios which invest in municipal obligations may invest in
tender option bonds. A tender option bond is a municipal obligation (generally
held pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults by, or a significant downgrading in the
credit rating assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a
Portfolio. The liquidity of a tender option bond is a function of the credit
quality of both the bond issuer and the financial institution providing
liquidity. Consequently, tender option bonds are deemed to be liquid unless, in
the opinion of the Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Portfolio's credit
quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios intend to invest in tender option bonds the interest
on which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such
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tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. A similar risk exists for certain other investments
subject to puts or similar rights. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the proper
tax treatment of tender options and the associated fees, in relation to various
regulated investment company tax provisions is unclear. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intend to
manage their respective portfolios in a manner designed to eliminate or minimize
any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New
York Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obligations, including
risks relating to future political and economic developments, nationalization,
foreign governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Portfolios, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Portfolios. Thus,
the issue may not be said to be publicly offered. Unlike securities which must
be registered under the Securities Act of 1933 prior to offer and sale,
municipal obligations which are not publicly offered may nevertheless be readily
marketable.
Municipal obligations purchased for a Portfolio may be subject to the
Portfolio's policy on holdings of illiquid securities. The Adviser determines
whether a municipal obligation is liquid based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The Adviser believes that the quality standards applicable to each Portfolio's
investments enhance liquidity. In addition, stand-by commitments and demand
obligations also enhance liquidity.
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Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
INVESTING IN CALIFORNIA
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the Tax-Exempt
California Portfolio. The following section provides only a brief summary of
the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
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states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32.6
million represents over 12% of the total United States population and grew by
27% in the
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1980s. While California's substantial population growth during the 1980's
stimulated local economic growth and diversification and sustained a real estate
boom between 1984 and 1990, it increased strains on California's limited water
resources and demands for government services. Population growth slowed since
1991 even while substantial immigration has continued, due to a significant
increase in outmigration by California residents. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
were in Southern California, led by declines in the aerospace and construction
industries. Significantly related to cuts in lost federal defense spending.
Since the start of 1994, the California economy has been in a steady
recovery in all parts of the State. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing, wholesale
and retail trade, electronics, exports, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels were reached in 1996. Unemployment in California is down more than three
percent from its 10% peak in January, 1994, but still remains higher than the
national average rate.
Constitutional Limitations on Taxes, Other Changes and Appropriations
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Limitations on Property Taxes. Certain California Instruments may
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be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
power of California local governments and districts is limited by Article XIIIA
of the California constitution, also known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem taxes above the
1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
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Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires voters of
any governmental unit to give two-thirds approval to levy any "special tax".
Court decisions, however, allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
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voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
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In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters, (2)
appropriations arising from certain emergencies declared by the Governor, (3)
appropriations for certain capital outlay projects, (4) appropriations by the
State of post 1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions. The State
must refund 50% paid to schools and community colleges. With more liberal
annual adjustment factors since 1988, and depressed revenues since 1990 because
of the recession, few governments, including the State, are currently operating
near
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their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations more than $7 billion under
the Article XIIIB limit. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies of their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these articles on California Instruments. It is not presently
possible to predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of these articles, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on
----------
outstanding general obligation bonds is the second charge to the General Fund
after support of the public school system and public institutions of higher
education. Total outstanding general obligation bonds and lease purchase debt
of California increased from $9.4 billion at June 30, 1987 to $23.8 billion at
March 1, 1997. The State also had outstanding at March 1, 1997 $358 million of
general obligation commercial paper notes which will be refunded into long-term
bonds at a later date. In FY1995-96, debt service on general obligation bonds
and lease purchase debt was approximately 5.2% of General Fund revenues. State
voters approved $6.4 billion of new general obligation bond authorizations on
the 1996 ballots.
Recent Financial Results. The principal sources of General Fund
------------------------
revenues in 1995-1996 were the California personal income tax (45% of total
revenues), the sales tax (34%), bank and corporation taxes (13%), and the gross
premium tax on insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "SFEV"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund.
General. Throughout the 1980s, California state spending increased
-------
rapidly as California's population and economy also grew rapidly, including
increased spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Beginning at the start of the 1990-91 Fiscal Year, California faced
adverse economic, fiscal and budget conditions. The economic
20
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recession seriously affected California's tax revenues. It also caused
increased expenditures for health and welfare programs. Even though the economy
is recovering, California is still facing a structural imbalance in its budget
with the largest programs supported by the General Fund (education, health,
welfare and corrections) growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. These structural concerns will
be exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the
--------------
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Fiscal Years 1991-92 to 1995-96, including the following (not all of
these actions were taken each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in mandates on local
government;
. transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs,
coupled with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal
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Year, the accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, to carry the final retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results. While General Fund revenues and
expenditures were essentially equal in FY 1992-93 (following two years of excess
expenditures over revenues), the General Fund had positive operating results in
FY 1993-94 and 1995-96, which reduced the accumulated budget deficit to less
than $100 million as of June 30, 1996. The State Department of Finance estimated
that the General Fund received revenues of about $46.3 billion in FY 1995-96,
more than $2 billion higher than was originally expected, as a result of the
strengthening economy. Expenditures totaled about $45.4 billion, also about $2
billion higher than budgeted, because, among other factors, the State
Constitution requires disbursement of a percentage of revenues to local school
districts and federal actions to reduce welfare costs and to pay for costs of
illegal immigrants were not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring
1992 until 1995, the State had to rely on issuance of short-term notes which
matured in a subsequent fiscal year to finance its ongoing deficit and pay
current obligations. With the repayment of the last of these deficit notes in
April, 1996, the State does not plan to rely further on external borrowing
across fiscal years, but will continue its normal cash flow borrowing during a
fiscal year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on
--------------
July 15, 1996, along with various implementing bills. The Legislature rejected
the Governor's proposed 15% cut in personal income taxes (to be phased over
three years), but did approve a 5% cut in bank and corporation taxes, to be
effective for
22
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income years starting on January 1, 1997. As a result, revenues for the Fiscal
Year are estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by
$1.65 billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class-size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts required federal law changes (including welfare reform, which was
enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California
and the California State University system, with no increases in student fees
for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed,
that, on June 30, 1997, the State's available internal borrowable (cash)
resources will be $2.9 billion, after payment of all obligations due by that
date, so that no external cross-fiscal year borrowing will be needed. The State
will continue to rely on
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internal borrowing and intra-year external note borrowing to meet its cash flow
requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $800 million above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal
welfare reform law will impact the State's finances, or those of its local
agencies; the State is in the midst of making many decisions concerning
implementation of the new welfare law.
Proposed 1997-98 Budget On January 9, 1997, the Governor released his
-----------------------
proposed budget for FY 1997-98. Assuming continuing strength in the economy,
the Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce
class size in lower primary grades, using excess revenues from FY 1996-97. He
also proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to
the State government, the State's budget continues to be under stress from
mandated spending on education, a rising prison population, and social needs of
a growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.
Bond Ratings. The ratings on California's long-term general
------------
obligation bonds were reduced in the early 1990's from "AAA" levels which had
existed prior to the recession. In 1996, Fitch and Standard & Poor's raised
their ratings of California's general obligation bonds, which are currently
assigned ratings of "A+" from Standard & Poor's, "A1" from Moody's and "A+" from
Fitch. There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal
------------------
proceedings (described in California's recent financial statements) that, if
decided against California, may require California to make
24
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significant future expenditures or may substantially impair revenues. Courts
have recently entered decisions which could overturn several parts of the
state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System, reductions in welfare payments and the use of certain cigarette tax
funds for health costs. All of these cases are subject to further proceedings
and appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year.
Obligations of Other Issuers
----------------------------
Other Issuers of California Instruments. There are a number of state
---------------------------------------
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the credit
quality of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State of
California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of counties have
indicated that their budgetary condition is extremely serious. In the 1995-96
and 1996-97 fiscal years, Los Angeles County, the largest in the State, had to
make significant cuts in services and personnel, particularly in the health care
system in order to
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<PAGE>
balance its budget. The County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange County, which recently emerged from federal bankruptcy
protection, has substantially reduced services and personnel in order to live
within much reduced means.
Counties and cities may face further budgetary pressures as a result
of changes in welfare and public assistance programs, which will have to be
enacted by June, 1997 in order to comply with the federal welfare reform law.
It is now yet known how the State's legislation will turn out and what its
overall impact will be on local government finances.
Assessment Bonds. California Instruments which are assessment bonds
----------------
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long-Term Lease Obligations. Certain California long-term
--------------------------------------
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain funds to
cover operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a state receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State of California was a named defendant
(on the grounds that it controlled the District's finances). One of the
defenses raised in answer to this lawsuit
26
<PAGE>
was the invalidity of the District's lease. The trial court upheld the validity
of the lease, and the case was subsequently settled. Any ultimate judgment in
any future case against the position taken by the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
Other Considerations
--------------------
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in state regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California Instruments in which the California
Portfolio may invest, future allocations of state revenues to local governments
or the abilities of state or local governments to pay the interest on, or repay
the principal of, such California Instruments.
27
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Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the Tax-Exempt California Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the federal or state government to
appropriate sufficient funds within their respective budget limitations.
INVESTING IN NEW YORK
- ---------------------
Some of the significant financial considerations relating to the Tax-
Exempt New York Portfolio's investments in New York Instruments are summarized
below. This summary information is not intended to be a complete description
and is principally derived from official statements relating to issues of New
York Instruments that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
STATE ECONOMY. New York is the third most populous state in the nation and has
- -------------
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
State per capita income for 1994 was estimated at $25,999, which was 19.2% above
the 1994 estimated
28
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national average of $21,809. Between 1975 and 1990 total employment grew by
21.3 percent while the labor force grew only by 15.7 percent. During this
period, unemployment fell from 9.5 percent to 5.2 percent of the labor force.
In 1991 and 1992, however, total employment in the State fell by 5.5 percent.
As a result, the unemployment rate rose to 8.5 percent reflecting a recession
that has had a particularly strong impact on the entire Northeast. Calendar
years 1993 and 1994 saw only a partial recovery.
STATE BUDGET. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it.
The Governor's Executive Budget projected balance on a cash basis in
the General Portfolio. It reflected a continuing strategy of substantially
reduced State spending, including program restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives.
On March 15, 1996, the Governor presented amendments to the 1996-97
Executive Budget to provide for balancing the 1996-97 state financial plan if
the federal government failed to adopt entitlement changes assumed to produce
savings in the State's 1996-97 Executive Budget.
The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").
The 1996-97 State Financial Plan was projected to be balanced on a
cash basis. As compared to the Governor's proposed budget as revised on March
20, 1996, the 1996-97 State Financial Plan increases General Portfolio spending
by $842 million, primarily from funding increased for education, special
education and higher education ($563 million). The balance represented funding
increases
29
<PAGE>
to a variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected for
1996-97 based on higher-than-projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new State tax amnesty
program, and other resources including certain non-recurring resources.
The State issued its first update to the 1996-97 State Financial Plan
(the "Mid-Year Update") on October 25, 1996. Revisions have been made to
estimates of both receipts and disbursements based on: (1) updated economic
forecasts for both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflected a
balanced 1996-97 State Financial Plan, with a reserve for contingencies in the
General Portfolio of $300 million. This reserve will be utilized to help offset
a variety of potential risks and other unexpected contingencies that the State
may face during the balance of the 1996-97 fiscal year.
Although revisions to the 1996-97 State Financial Plan contained in
the Mid-Year Update are favorable, the State faces certain risks which could
potentially cost the State up to one-half billion dollars. The Division of the
Budget believes these risks are balanced by reserves in the 1996-97 State
Financial Plan, including the $300 million reserve created in the Mid-Year
Update. However, there can be no assurance that these reserves will fully
offset litigation or other risks to the 1996-97 State Financial Plan.
One major uncertainty to the 1996-97 State Financial Plan continues to
be risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. An
additional risk to the 1996-97 State Financial Plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Similarly, certain litigation which by itself did not produce a
material judgment against the State could have an adverse impact on the 1996-97
State Financial Plan because of the precedential nature of the court's decision.
Specifically, the State Court of Appeals has denied a motion to appeal a lower
court decision in the so-called "GTE Spacenet" case, in which the court ruled
that GTE Spacenet was not subject to the 3.5 percent tax on gross receipts
imposed under section 186-a of the tax law. The court decision is limited to
provisions of section 186-a as it existed prior to the 1995 amendments, and has
little prospective effect. While this litigation in and of itself carries only
a small judgment in favor of GTE Spacenet and similar companies, the
consequences of the ruling could eventually entail refunds to other taxpayers of
several hundred million dollars. Refund claims of over
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<PAGE>
$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 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
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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.
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.
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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 (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal
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borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that the State is
able to meet its cash flow needs in the first quarter of the fiscal year without
relying on short-term seasonal borrowings.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State Portfolios dedicated for transportation purposes), and
not by the full faith and credit of the State. In addition, the proposed
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The
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projection of the State regarding its borrowings for the 1996-97 fiscal year may
change if circumstances require.
In the 1996 legislative session, the Legislature approved the
Governor's proposal to present to the voters in November 1996 a $1.75 billion
State general obligation bond referendum to finance various environmental
improvement and remediation projects. The Clean Water, Clean Air Bond Act was
approved by the voters in November 1996. As a result, the amount of general
obligation bonds issued during the 1996-97 fiscal year may increase above the
$411 million currently included in the 1996-97 borrowing plan to finance a
portion of this new program.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes were $735 million for the 1995-96
fiscal year, and were estimated to be $719 million for the 1996-97 fiscal year.
Principal and interest payments on fixed rate and variable rate bonds issued by
LGAC were $340 million for the 1995-96 fiscal year, and were estimated to be
$323 million for 1996-97.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
LITIGATION. Certain litigation pending against the State or its officers or
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employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (5)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (6) challenges by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; and (10) an action seeking
reimbursement from the State for certain costs arising out of the provision of
pre-school services and programs for children with handicapped conditions.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided
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against the State. As a result, the Comptroller developed a plan to restore the
State's retirement systems to prior funding levels. Such funding is expected to
exceed prior levels by $116 million in fiscal 1996-97, $193 million in fiscal
1997-98, peaking at $241 million in fiscal 1998-99. Beginning in fiscal 2001-
02, State contributions required under the Comptroller's plan are projected to
be less than that required under the prior funding method. As a result of the
United States Supreme Court decision in the case of State of Delaware v. State
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of New York, on January 21, 1994, the State entered into a settlement agreement
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with various parties. Pursuant to all agreements executed in connection with
the action, the State was required to make aggregate payments of $351.4 million.
Annual payments to the various parties will continue through the State's 2002-03
fiscal year in amounts which will not exceed $48.4 million in any fiscal year
subsequent to the State's 1994-95 fiscal year. Litigation challenging the
constitutionality of the treatment of certain moneys held in a reserve Portfolio
was settled in June 1996 and certain amounts in a Supplemental Reserve Portfolio
previously credited by the State against prior State and local pension
contributions will be paid in 1998.
The legal proceedings noted above involve State finances, State
programs and miscellaneous tort, real property and contract claims in which the
State is a defendant and the monetary damages sought are substantial. These
proceedings could affect adversely the financial condition of the State.
Adverse developments in these proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1996-97 State
Financial Plan. An adverse decision in any of these proceedings could exceed
the amount of the 1996-97 State Financial Plan reserve for the payment of
judgments and, therefore, could affect the ability of the State to maintain a
balanced 1996-97 State Financial Plan. In its audited financial statements for
the fiscal year ended March 31, 1996, the State reported its estimated liability
for awarded and anticipated unfavorable judgments to be $474 million.
Although other litigation is pending against New York State, except as
described herein, no current litigation involves New York State's authority, as
a matter of law, to contract indebtedness, issue its obligations, or pay such
indebtedness when it matures, or affects New York State's power or ability, as a
matter of law, to impose or collect significant amounts of taxes and revenues.
AUTHORITIES. The fiscal stability of New York State is related, in part, to the
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fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations,
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particularly with respect to debt that is State-supported or State-related. As
of September 30, 1995, date of the latest data available, there were 17
Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 17 Authorities was $73.45
billion.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State Portfolios.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State of New York
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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 upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On July 10, 1995, S&P
downgraded its rating on the City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. S&P stated that New York City's
reliance on one-time revenue measures to close annual budget gaps,
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a dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the City's continued high debt levels
also contributed to its decision to lower the rating. Moody's currently has the
City's rating under review for a possible downgrade.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
proceeds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do
not constitute an enforceable obligation or debt of either the State or the
City. As of December 31, 1995, MAC had outstanding an aggregate of
approximately $4.684 billion of its bonds. MAC is authorized to issue bonds and
notes to refunds its outstanding bonds and notes and to fund certain reserves,
without limitation as to principal amount, and to finance certain capital
commitments to the Transit Authority and the New York City School Construction
Authority for the 1992 through 1997 fiscal years in the event the City fails to
provide such financing.
The City and MAC have reached an agreement in principle under which
MAC will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal
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years covering the City and certain agencies showing balanced budgets determined
in accordance with GAAP. New York State also established the Office of the
State Deputy Comptroller for New York City ("OSDC") to assist the Control Board
in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period.
This means that the Control Board's powers of approval are suspended, but the
Board continues to have oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the City
Financial Plan reflected a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the federal share of Medicaid costs otherwise paid by the City. This strategy
has been the subject of substantial debate, and implementation of this strategy
will be significantly affected by State and federal budget proposals currently
being considered. It is likely that the City Financial Plan will be changed
significantly in connection with the preparation of the Executive Budget for the
1997 fiscal year as a result of the status of State and federal budget proposals
and other factors.
The City Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999
fiscal years, respectively, assuming successful implementation of the gap-
closing program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal
years included: (i) additional agency actions, totaling between $643 million
and $691 million in each of the 1997 through
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1999 fiscal years; (ii) additional savings resulting from State and federal aid
and cost containment in entitlement programs to reduce City expenditures and
increase revenues by $650 million in the 1997 fiscal year and by $727 million in
each of the 1998 and 1999 fiscal years; (iii) additional proposed federal aid of
$50 million in the 1997 fiscal year and State aid of $100 million in each of the
1997 through 1999 fiscal years; (iv) the receipt of $300 million in the 1997
fiscal year from privatization or other initiatives, certain of which actions is
expected to require legislative action by the City Council; and (v) the assumed
receipt of revenues relating to rent payments for the City's airports, totaling
$244 million, $226 million and $70 million in the 1997 through 1999 fiscal
years, respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
federal or State actions included in the federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for
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dealing with the large projected budget gap for the 1997 fiscal year.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the State's projections of its receipts and disbursements.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1994.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased
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expenditure requirements on affected localities. If New York State, New York
City or any of the Authorities were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within New York State
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions and long-
range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing New York State assistance in the
future.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios each may acquire the right
to sell a security to another party at a guaranteed price and date. Such a
right to resell may be referred to as a put, demand feature or "standby
commitment", depending on its characteristics. The aggregate price which a
Portfolio pays for securities with standby commitments may be higher than the
price which otherwise would be paid for the securities. Standby commitments may
not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic
or foreign banks supporting the other party's ability to purchase the security
from the Portfolio. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by the Portfolio. In considering whether a security meets a Portfolio's quality
standards, the Adviser will look to the creditworthiness of the party providing
the Portfolio with the right to sell.
The Portfolios value municipal obligations which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Portfolio's
net asset value. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the policy of each Portfolio that may enter into standby commitment transactions
is to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service
has issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt
42
<PAGE>
California Portfolio were series, has received a ruling from the Internal
Revenue Service to the effect that it is considered the owner of the municipal
obligations subject to standby commitments so that the interest on such
instruments will be tax-exempt income to it. The Internal Revenue Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or acquired or held with certain other types of put rights
and that its distributions of tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt for its unitholders. There is no
assurance that standby commitments will be available to a Portfolio nor has any
Portfolio assumed that such commitments will continue to be available under all
market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any
Portfolio without the approval of the majority of outstanding voting securities
of that Portfolio (which, under the Investment Company Act and the rules
thereunder and as used in the Prospectus and this Statement of Additional
Information, means the lesser of (1) 67% of the units of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding units of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding units of that Portfolio). Investment restrictions that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio, with the exception of borrowings
permitted by Investment Restriction (3).
Accordingly, the Trust may not, on behalf of any Portfolio:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company under the Investment Company Act of
1940, as amended ("the Act"). This restriction does not, however, apply to
any Portfolio classified as a non-diversified company under the Act.
(2) purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of action,
when
43
<PAGE>
otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, obligations (other than commercial paper)
issued or guaranteed by U.S. banks and U.S. branches of U.S. or foreign
banks and repurchase agreements and securities loans collateralized by such
U.S. Government obligations or such bank obligations. For the purposes of
this restriction, state and municipal governments and their agencies,
authorities and instrumentalities are not deemed to be industries;
telephone companies are considered to be a separate industry from water,
gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly
owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of their parents. Notwithstanding the foregoing, the ILA Money
Market Portfolio will invest more than 25% of the value of its total assets
in bank obligations (whether foreign or domestic) except that if adverse
economic conditions prevail in the banking industry the ILA Money Market
Portfolio may, for defensive purposes, temporarily invest less than 25% of
the value of its total assets in bank obligations.
(3) borrow money, except (a) that the Portfolio may borrow from banks
(as defined in the Act) or through reverse repurchase agreements in amounts
up to 33 1/3% of its total assets (including the amount borrowed), (b) the
Portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) the Portfolio may
purchase securities on margin to the extent permitted by applicable law.
(4) make loans, except (a) through the purchase of debt obligations in
accordance with each Portfolio's investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Portfolio may be deemed to be an
underwriting.
(6) purchase, hold or deal in real estate, although the Portfolio may
purchase and sell securities that are secured by real estate or interests
therein, securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by the Portfolio as a
result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial
44
<PAGE>
instruments and contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Portfolio may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objectives, restrictions and policies as the Portfolio.
As money market funds, the Portfolios must also comply with Rule 2a-7 under
the Investment Company Act. Amendments to Rule 2a-7 have been proposed and are
expected to be effective at some time in 1997. The following assumes that such
amendments are in effect as currently proposed. While a detailed and technical
Rule, Rule 2a-7 has three basic requirements: portfolio maturity, portfolio
quality and portfolio diversification. Portfolio maturity. Rule 2a-7 requires
that the maximum maturity of any security in a Portfolio's portfolio may not
exceed 397 days and a Portfolio's average portfolio maturity may not exceed 90
days. Portfolio quality. A money market fund may only invest in First Tier and
Second Tier securities (as defined in the Rule and the Prospectus). Each
Portfolio, other than the Tax-Exempt Portfolios, as a matter of non-fundamental
policy only invests in First Tier securities. Portfolio diversification. The
Prime Obligations, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Exempt Diversified Portfolios may not invest more
than 5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such Portfolios may, however, invest up to 25% of its total assets in
the First Tier Securities of a single issuer for a period of up to three
business days after the purchase thereof. Tax-Exempt New York and Tax-Exempt
California Portfolios, with respect to 75% of their respective total assets, may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee or
unconditional demand feature); provided that such funds may not invest more than
5% of their respective total assets in the securities of a single issuer unless
the securities are First Tier securities. Immediately after the acquisition of
any put (i.e., the right to sell the security within a specified period at a
price equal to its amortized cost), with respect to 75% of the assets of a
Portfolio, no more than 10% of the Portfolio's total assets may be invested in
securities issued by or subject to puts issued by the same issuer. In the case
of the Tax-Exempt Portfolios (which are the only Portfolios that invest in
Second Tier securities), immediately after the acquisition of a put that is a
Second Tier security, no more than 5% of the Tax-Exempt Portfolio's total assets
may be invested in securities or puts
45
<PAGE>
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 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 (June 1994 to April 1996);
Senior Vice President of Scott Paper
Company until June 1994; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of
the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-
1996); Co-Head of GSAM (since
December 1994).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John P. McNulty, 44 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner of Goldman Sachs (1990-1994 and
1995-1996); Co-Head of GSAM (since November
1995); Limited Partner of Goldman Sachs
(1994 to November 1995).
*Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of Josiah
Bryn Mawr, PA 19010 Macy, Jr. Foundation (since 1977);
Director of the Philadelphia Contributionship
(since 1985); Director of Amherst
College (since 1986); Director
of Dayton Hudson Corporation (since 1988);
Director of the Spencer Foundation (since 1993);
and member of PNC Advisory Board (since 1993).
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs
One New York Plaza (since 1994); Director and
New Yor, NY 10004 Vice President of Goldman Sachs Funds
Management, Inc. (from April 1990 to
November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One 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 of Ameritech (a telecommunications holding
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
company)(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co.
(a closed-end, management investment
company).
Richard P. Strubel, 57 Trustee Managing Director, Tandem
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).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996); President,
New York, NY 10004 MFS Retirement Services Inc.,
of Massachusetts Financial
Services(prior thereto).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, GSAM (since April
New York, NY 10004 1994); Assistant Treasurer,
Goldman Sachs Funds Management,
Inc. (since March 1993); Vice
President, Goldman Sachs (since
March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust
Company (November 1993 to July
1995); Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL 60606 Director, Shareholder Servicing
of GSAM (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder Servicing
Chicago, IL 60606 of GSAM (since November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder Ser-
Chicago, IL 60606 vicing of GSAM (since November 1989).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY 10004 Vice President and Assistant
General Counsel of Goldman Sachs (since June
1992); 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, GSAM (since November 1993);
Associate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since
March 1997); Associate of Shereff
Friedman, Hoffman & Goodman
(prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst,
85 Broad Street Secretary Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 to June
1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM
New York, NY 10004 (since 1988).
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (1995-1996);
Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst,
Prudential Insurance (1991-1993).
</TABLE>
49
<PAGE>
Each interested Trustee and officer holds comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or an affiliate
thereof is the investment adviser, administrator and/or distributor. As of
April 1, 1997, the Trustees and officers of the Trust as a group owned less than
1% of the outstanding units of beneficial interest of each of the Portfolios.
The Trust pays each of its Trustees, other than those who are "interested
persons" of Goldman Sachs a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
50
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Funds
Compensation Part of (including
from the Portfolios' the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $18,150 $0 $62,450
Ashok N. Bakhru $22,729 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $18,893 $0 $58,954
William H. Springer $18,893 $0 $58,954
Richard P. Strubel $18,893 $0 $58,954
</TABLE>
- --------------
* The Goldman Sachs Funds consisted of 29 mutual funds, including the nine
portfolios, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
51
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit certain
other expenses (excluding fees payable to Service Organizations, taxes,
interest, brokerage and litigation, indemnification and other extraordinary
expenses) of each Portfolio, on an annualized basis, to .06% of the average
daily net assets of the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios; and to .07% of the average daily
net assets of the Prime Obligations, Treasury Obligations, Government and Tax-
Exempt California Portfolios. The amount of such reductions or limits, if any,
are calculated monthly and are based on the cumulative difference between a
Portfolio's estimated annualized expense ratio and the expense limit for that
Portfolio. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed to waive a portion of its
advisory fee for the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios during the fiscal year ended
December 31, 1996.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the Portfolios'
custodian, fees and expenses of the Portfolios' transfer agent, filing fees for
the registration or qualification of Units under federal or state securities
laws, expenses of the organization of the Portfolios, taxes (including income
and excise taxes, if any), interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against,
the Portfolios for violation of any law, legal and auditing and tax fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of Goldman Sachs with respect to the
52
<PAGE>
Portfolios), expenses of preparing and setting in type prospectuses, statements
of additional information, proxy material, reports and notices, the printing and
distribution of the same to Unitholders and regulatory authorities, its
proportionate share of the compensation and expenses of its "non-interested"
Trustees, and extraordinary expenses incurred by the Portfolios.
The Advisory Agreement entered into on behalf of the Portfolios was
most recently approved by the Board of Trustees, including the"non-interested"
Trustees, on April 23, 1997 and by the unitholders of each Portfolio (other than
the Treasury Instruments and Tax-Exempt New York Portfolios) on April 19, 1990
and by the unitholders of the Treasury Instruments and Tax-Exempt New York
Portfolios on June 3, 1991. The Advisory Agreement will remain in effect until
June 30, 1998, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by a majority of the Trustees or by a
vote of a majority of the outstanding voting securities of the particular
Portfolio, as defined in the Investment Company Act, and, in either case, by a
majority of "non-interested" Trustees.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994 the amount of the advisory fee incurred by each Portfolio was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio $5,185,990 $6,728,074 $9,135,344
Money Market Portfolio 2,955,074 2,618,275 2,663,551
Treasury Obligations Portfolio 3,157,511 3,206,490 3,545,307
Treasury Instruments Portfolio 1,555,342 1,079,236 687,965
Government Portfolio 2,509,206 3,259,056 4,804,362
Federal Portfolio 5,426,430 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,850,742 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,410,751 1,030,447 867,058
Tax-Exempt New York Portfolio 266,835 234,853 150,735
</TABLE>
GSAM agreed not to impose a portion of its advisory fees for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994 with respect to
the Money Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-
Exempt New York Portfolios. Had such fees been imposed, the following
additional fees would have been incurred for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Money Market Portfolio $ 492,512 $ 436,325 $ 443,925
Treasury Instruments Portfolio 2,073,789 1,438,992 917,292
Federal Portfolio 4,069,823 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,540,297 1,518,129 1,749,116
Tax-Exempt New York Portfolio 92,366 109,464 123,050
</TABLE>
53
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Portfolio during various periods of 1996, 1995 and 1994 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, the following additional expenses would have
been incurred for such years:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $234,432 $347,317 $635,085
Money Market Portfolio 243,590 135,715 301,326
Treasury Obligations Portfolio 212,886 203,882 371,456
Treasury Instruments Portfolio 220,794 223,652 150,525
Government Portfolio 231,536 276,785 526,310
Federal Portfolio 452,463 302,153 326,417
Tax-Exempt Diversified Portfolio 24,367 239,829 217,296
Tax-Exempt California Portfolio 22,092 19,625 34,612
Tax-Exempt New York Portfolio 16,029 32,403 51,675
</TABLE>
The Advisory Agreement provides that GSAM shall not be liable to a
Portfolio for any error of judgment by GSAM or for any loss sustained by the
Portfolio except in the case of GSAM's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. Each Portfolio may use any name
derived from the name "Goldman Sachs" only so long as the Advisory Agreement
remains in effect. The Advisory Agreement also provides that it shall terminate
automatically if assigned and that it may be terminated with respect to any
particular Portfolio without penalty by vote of a majority of the Trustees or a
majority of the outstanding voting securities of that Portfolio on 60 days'
written notice to GSAM or by GSAM without penalty at any time on 90 days'
written notice to the Trust.
Under the Advisory Agreement, GSAM is also responsible for the
administration of each Portfolio's business affairs subject to the supervision
of the Trustees and, in connection therewith, furnishes each Portfolio with
office facilities and is responsible for ordinary clerical, recordkeeping and
bookkeeping functions, to the extent not provided pursuant to the Portfolios'
custodian agreements; preparation and filing of documents required to comply
with federal and state securities laws; supervising the activities of the
Portfolios' custodian and transfer agent; providing assistance in connection
with meetings of the Trustees and unitholders; and other administrative services
necessary to conduct the Trust's business.
In managing the Tax-Exempt Diversified Portfolio, the Tax-Exempt
California Portfolio and the Tax-Exempt New York Portfolio, GSAM will draw upon
the extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service
54
<PAGE>
costs, liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs retained approximately $300 of commissions on redemptions of Class B
shares during 1996. Goldman Sachs also serves as the Portfolios' transfer
agent. Goldman Sachs provides customary transfer agency services to the
Portfolios, including the handling of unitholder communications, the processing
of unitholder transactions, the maintenance of unitholder account records,
payment of dividends and distributions and related functions. For these
services, Goldman Sachs receives .04% (on an annualized basis) of the average
daily net assets with respect to each Portfolio (other than the Prime
Obligations Portfolio). With respect to the Prime Obligations Portfolio,
Goldman Sachs is entitled to receive a fee from the Portfolio equal to the
classes proportionate share of the total transfer agency fees borne by the
Portfolio, which are equal to $12,000 per year plus $7.50 per account, together
with out-of-pocket expenses (including those out of pocket expenses payable to
servicing agents) applicable to ILA Class B Units and .04% of the average daily
net assets of the other classes of the Prime Obligations Portfolio. Goldman
Sachs may from time to time agree that the fee it would otherwise be entitled to
receive under its transfer agency agreement will be reduced.
For the fiscal years ended December 31, 1996, December 31, 1995 and December 31,
1994 the Portfolios incurred transfer agency fees as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Prime Obligations Portfolio $ 592,685 $768,923 $1,044,039
Money Market Portfolio 394,010 349,060 355,140
Treasury Obligations Portfolio 360,858 366,456 405,178
Treasury Instruments Portfolio 414,758 287,798 183,457
Government Portfolio 286,766 372,463 549,070
Federal Portfolio 1,085,286 908,708 679,243
Tax-Exempt Diversified Portfolio 616,119 607,252 699,643
Tax-Exempt California Portfolio 161,229 117,765 99,092
Tax-Exempt New York Portfolio 41,051 39,298 32,139
</TABLE>
Goldman Sachs is one of the largest international investment banking
firms in the United States. Founded in 1869, Goldman Sachs is a major
investment banking and brokerage firm providing a broad range of financing and
investment services both in the United States and abroad. As of November 29,
1996, Goldman Sachs and its consolidated subsidiaries had assets of
approximately $152 billion and partners' capital of $5.2 billion. Goldman
Sachs became registered as an investment adviser in 1981. As of March 24, 1997,
Goldman Sachs, together with its affiliates, acted as investment
55
<PAGE>
adviser, administrator or distributor for approximately $104.9 billion in total
assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS
-----------------------------------------------------------------
MANAGED BY GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and
- ------------------------
their affiliates, in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Adviser and its advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Portfolios and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Portfolios. Goldman Sachs and its affiliates are major participants in the
global currency, equities, swap and fixed-income markets, in each case on a
proprietary basis and for the accounts of customers. As such, Goldman Sachs and
its affiliates are actively engaged in transactions in the same securities,
currencies, and instruments in which the Portfolios invest. Such activities
could affect the prices and availability of the securities, currencies, and
instruments in which the Portfolios invest, which could have an adverse impact
on each Portfolio's performance. Such transactions, particularly in respect of
proprietary accounts or customer accounts other than those included in the
Adviser's and its advisory affiliates' asset management activities, will be
executed independently of the Portfolios' transactions and thus at prices or
rates that may be more or less favorable. When the Adviser and its advisory
affiliates seek to purchase or sell the same assets for their managed accounts,
including the Portfolios, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
to be equitable. In some cases, this system may adversely affect the size or the
price of the assets purchased or sold for the Portfolios.
From time to time, the Portfolios' activities may be restricted
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. As a result, there may be periods, for example, when the Adviser,
and/or its affiliates, will not initiate or recommend certain types of
transactions in certain securities or instruments with respect to which, or in
securities of issuers for which, the Adviser and/or its affiliates are
performing services or when position limits have been reached.
In connection with their management of the Portfolios, the Adviser may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Adviser will not be under
any obligation, however, to effect transactions on behalf of the Portfolios in
accordance with such analysis and models. In addition, neither Goldman
Sachs
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<PAGE>
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Portfolios and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Portfolios. The proprietary activities or portfolio strategies of Goldman Sachs
and its affiliates or the activities or strategies used for accounts managed by
them or other customer accounts could conflict with the transactions and
strategies employed by the Adviser in managing the Portfolios.
The results of each Portfolio's investment activities may differ
significantly from the results achieved by the Adviser and its affiliates for
their proprietary accounts or accounts (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 Portfolio. Moreover, it is possible that a Portfolio will sustain losses
during periods in which Goldman Sachs and its affiliates achieve significant
profits on their trading for proprietary or other accounts. The opposite result
is also possible.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Portfolio's
activities, but will not be involved in the day-to-day management of such
Portfolio. In such instances, those individuals may, as a result, obtain
information regarding the Portfolio's proposed investment activities which is
not generally available to the public. In addition, by virtue of their
affiliation with Goldman Sachs, any such member of an investment policy
committee will have direct or indirect interests in the activities of Goldman
Sachs and its affiliates in securities, currencies and investments similar to
those in which the Portfolio invests.
In addition, certain principals and certain of the employees of the
Adviser are also principals or employees of Goldman Sachs or its affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Adviser may enter into transactions and invest in instruments in
which customers of Goldman Sachs serve as the counterparty, principal or issuer.
In such cases, such party's interests in the transaction will be adverse to the
interests of the Portfolios, and such party may have no incentive to assure
that the Portfolios obtain the best possible prices or terms in connection with
the transactions. Goldman Sachs and its affiliates may also create, write or
issue derivative instruments for customers of Goldman Sachs or its affiliates,
the underlying securities currencies or instruments of which may be those in
which the Portfolios invest or which may be based on the performance of
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<PAGE>
a Portfolio. The Portfolios may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Portfolios. At times, these activities may
cause departments of the Firm to give advice to clients that may cause these
clients to take actions adverse to the interest of the client. To the extent
affiliated transactions are permitted, the Portfolios will deal with Goldman
Sachs and its affiliates on an arm's-length basis.
Each Portfolio will be required to establish business relationships
with its counterparties based on the Portfolio's own credit standing. Neither
Goldman Sachs nor its affiliates will have any obligation to allow their credit
to be used in connection with a Portfolio's establishment of its business
relationships, nor is it expected that a Portfolio's counterparties will rely on
the credit of Goldman Sachs or any of its affiliates in evaluating the
Portfolio's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is
not required to, purchase and hold shares of a Portfolio in order to increase
the assets of the Portfolio. Increasing a Portfolio's assets may enhance
investment flexibility and diversification and may contribute to economies of
scale that tend to reduce a Portfolio's expense ratio. Goldman Sachs reserves
the right to redeem at any time some or all of the shares of a Portfolio
acquired for its own account. A large redemption of shares of a Portfolio by
Goldman Sachs could significantly reduce the asset size of the Portfolio, which
might have an adverse effect on a Portfolio's investment flexibility, portfolio
diversification and expense ratio. Goldman Sachs will consider the effect of
redemptions on a Portfolio and other unitholders in deciding whether to redeem
its units.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all
other accounts managed by GSAM for execution with many firms. GSAM uses its
best efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread
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<PAGE>
or commission, if any. Securities purchased and sold by the Portfolios are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in
many types of municipal and money market instruments. Its activities in this
regard could have some effect on the markets for those instruments which the
Portfolios buy, hold or sell. An order has been granted by the SEC under the
Investment Company Act which permits the Portfolios to deal with Goldman Sachs
in transactions in certain taxable securities in which Goldman Sachs acts as
principal. As a result, the Portfolios may trade with Goldman Sachs as
principal subject to the terms and conditions of such exemption.
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in
view of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for
more than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a 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 Portfolio believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
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<PAGE>
During the fiscal year ended December 31, 1996, the Trust acquired and
sold securities of its regular broker/dealers: Bear Stearns, Chase Manhattan,
Daiwa Securities, Lehman, Morgan Stanley, Smith Barney Inc., Swiss Bank Corp.
and Union Bank of Switzerland.
As of December 31, 1996, the Prime Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1 under the Investment Company Act, or their parents ($ in thousands):
Chase Manhattan ($57,038), Smith Barney ($30,000), Morgan Stanley ($58,323), and
Swiss Bank Corp. ($3,806).
As of December 31, 1996, the Money Market Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under the Investment Company Act, or their parents ($ in thousands): Bear
Stearns ($34,778), Morgan Stanley ($70,359), Chase Manhattan ($30,388), and
Swiss Bank Corp. ($13,730).
As of December 31, 1996, the Treasury Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1, or their parents ($ in thousands): Bear Stearns Companies ($35,000),
Daiwa Securities ($35,000), Lehman ($35,000), Smith Barney Inc. ($30,000), Union
Bank of Switzerland ($30,000), Chase Manhattan ($107,833), Morgan Stanley
($129,400), and Swiss Bank Corp. ($58,316).
As of December 31, 1996, the Government Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1,
or their parents ($ in thousands): Bear Stearns Companies ($30,000), Daiwa
Securities ($30,000), Lehman ($30,000), Morgan Stanley ($120,363), Chase
Manhattan ($100,303), and Swiss Bank Corp. ($54,244).
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, 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
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<PAGE>
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During such periods, the yield to an
investor in a Portfolio may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on units of a Portfolio may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he or she
purchased units of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Portfolio's price per unit as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Portfolio's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per unit based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
unitholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of units in kind; or establishing a net
asset value per unit by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per unit at $1.00 the
Trustees have the authority (1) to reduce or increase the number of units
outstanding on a pro rata basis, and (2) to offset each unitholder's pro rata
portion of the deviation between the net asset value per unit and $1.00 from the
unitholder's accrued dividend account or from future dividends. Each Portfolio
may hold cash for the purpose of stabilizing its net asset value per unit.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Portfolio's units.
In order to continue to use the amortized cost method of valuation for
each Portfolio's investments, the Portfolios must comply with Rule 2a-7. See
"Investment Restrictions."
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The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B 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.
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
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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) to the 365th power/7] - 1
The Tax-Exempt Diversified, Tax-Exempt California, Tax-Exempt New
York, Federal and Treasury Instruments Portfolios may also advertise a tax-
equivalent yield which is computed by dividing that portion of a Portfolio's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, the return for a Portfolio will fluctuate
from time to time and does not provide a basis for determining future returns.
Return is a function of portfolio quality, composition, maturity and market
conditions as well as of the expenses allocated to each Portfolio. The return
of a Portfolio may not be comparable to other investment alternatives because of
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Portfolio
with respect to ILA Units, ILA Administration Units, ILA Service Units and ILA
Class B Units for the seven-day period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio:
ILA Units 5.12 5.25 N/A
ILA Administration Units 4.97 5.10 N/A
ILA Service Units 4.72 4.85 N/A
ILA Class B Units 4.12 4.25 N/A
Money Market Portfolio:
ILA Units 5.20 5.33 N/A
ILA Administration Units 5.05 5.18 N/A
ILA Service Units 4.80 4.93 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Treasury Obligations Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Treasury Instruments Portfolio:
ILA Units 4.84 4.95 N/A
ILA Administration Units 4.69 4.80 N/A
ILA Service Units 4.44 4.55 N/A
Government Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Federal Portfolio:
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Tax-Exempt Diversified Portfolio:
ILA Units 3.58 3.64 5.93
ILA Administration Units 3.43 3.49 5.68
ILA Service Units 3.18 3.24 5.26
Tax-Exempt California Portfolio***:
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.52 3.58 5.83
ILA Administration Units 3.37 3.43 5.58
ILA Service Units** 3.12 3.18 5.17
</TABLE>
- -------------------------
* 6.39%, 6.12% and 5.67% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.72%, 6.43% and 5.96%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking California State taxes into account.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations voluntarily agreed to by the Adviser. See
"The Adviser, Distributor and Transfer Agent." In the absence of such fee
reductions and expense limitations, the yield of each Portfolio for the same
period would have been as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio
ILA Units 5.10 5.23 N/A
ILA Administration Units 4.95 5.08 N/A
ILA Service Units 4.70 4.83 N/A
ILA Class B Units 4.10 4.23 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Money Market Portfolio
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Treasury Obligations Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Treasury Instruments Portfolio
ILA Units 4.62 4.73 N/A
ILA Administration Units 4.47 4.58 N/A
ILA Service Units 4.22 4.33 N/A
Government Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Federal Portfolio
ILA Units 4.99 5.11 N/A
ILA Administration Units 4.84 4.96 N/A
ILA Service Units 4.59 4.71 N/A
Tax-Exempt Diversified Portfolio
ILA Units 3.48 3.54 5.76
ILA Administration Units 3.33 3.39 5.51
ILA Service Units 3.08 3.14 5.10
Tax-Exempt California Portfolio***
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.42 3.48 5.66
ILA Administration Units 3.27 3.33 5.41
ILA Service Units** 3.02 3.08 5.00
</TABLE>
- ----------
* 6.21%, 5.94% and 5.48% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.53%, 6.24% and 5.77%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking the California State Taxes into
account.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, the California top
marginal State personal income tax rate of 9.30% is being assumed in addition to
the 39.6% federal tax rate, for a combined tax rate of 46.42%. With respect to
the Tax-Exempt New York Portfolio, the tax equivalent yields are being shown
under
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three scenarios. The first scenario assumes a federal marginal tax rate of
39.6%, the second scenario assumes a New York top marginal State personal income
tax rate of 6.85%, for a combined effective tax rate of 44.94%. The third
scenario assumes a New York City top marginal personal income tax rate of 4.46%
in addition to the above federal and New York State tax rates, for a combined
effective tax rate of 47.63%. The combined tax rates assume full deductibility
of state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or recommended by GSAM and/or
its affiliates, certain attributes or benefits to be derived from asset
allocation strategies and the Goldman Sachs mutual funds that may form a part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's current economic outlook and domestic and
international market views and recommend periodic tactical modifications to
current asset allocation strategies. Such advertisements and information may
include other material which highlight or summarize the services provided in
support of an asset allocation program.
From time to time any Portfolio may publish an indication of its past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Money, Morningstar Mutual Funds, Micropal, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
The Trust may also advertise information which has been provided to the NASD
for publication in regional and local newspapers. In addition, the Trust may
from time to time advertise a Portfolio's performance relative to certain
indices and benchmark investments, including (without limitation): inflation and
interest rates, certificates of deposit (CDs), money market deposit accounts
(MMDAs), checking accounts, savings accounts and repurchase agreements. The
Trust may also compare a Portfolio's performance with that of other mutual funds
with similar investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Portfolio's performance data will be based on historical results and is not
intended to indicate future performance. A Portfolio's performance will vary
based on market conditions, portfolio expenses, portfolio investments and other
factors.
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Return for a Portfolio will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield or return.
The Trust may also, at its discretion, from time to time make a list of a
Portfolio's holdings available to investors upon request. The Trust may from
time to time summarize the substance of discussions contained in shareholder
reports in advertisements and publish the Adviser's views as to markets, the
rationale for a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to unitholders.
TAX INFORMATION
Each Portfolio has qualified and has elected or intends to qualify and elect
to be treated and to qualify as a separate regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code").
Such qualification does not involve supervision of management or investment
practices or policies by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) derive at least 90% of its gross income for the taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock or securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the Portfolio's total gross assets is represented by
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to an amount not greater in value than 5% of the
value of the Portfolio's total assets and not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of the
Portfolio's total (gross) assets is invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or two or more issuers controlled by the Portfolio and engaged in
the same, similar or related trades or businesses. For purposes of these
requirements, participation interests will be treated as securities, and the
issuer will be identified on the basis of market risk and credit risk associated
with any particular interest. Certain payments received with respect to such
interests, such as commitment fees and certain facility fees, may not be treated
as income qualifying under the 90% test.
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Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing and other requirements, provided that the
Portfolio distributes at least 90% of its investment company taxable income
(generally, all of its net taxable income other than "net capital gain," which
is the excess of net long-term capital gain over net short-term capital loss)
for such year and, in the case of any Portfolio that earns tax-exempt interest,
at least 90% of the excess of the tax-exempt interest it earns over certain
disallowed deductions. A Portfolio will be subject to federal income tax at
regular corporate rates on any investment company taxable income or net capital
gain that it does not distribute for a taxable year. In order to avoid a non-
deductible 4% federal excise tax, each Portfolio must distribute (or be deemed
to have distributed) by December 31 of each calendar year at least 98% of its
taxable ordinary income for such year, at least 98% of the excess of its capital
gains over its capital losses (generally computed on the basis of the one-year
period ending on October 31 of such year), and all taxable ordinary income and
the excess of capital gains over capital losses for the previous year that were
not distributed in such year and on which the Portfolio paid no federal income
tax.
Dividends paid by a Portfolio from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of unitholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid by a
Portfolio from the excess of net long-term capital gain (if any) over net short-
term capital loss are taxable to unitholders as long-term capital gain,
regardless of the length of time the units of a Portfolio have been held by such
unitholders, and also will not qualify for the corporate dividends-received
deduction. A Portfolio's net realized capital gains for a taxable year are
computed by taking into account realized capital losses, including any capital
loss carryforward of that Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Dividends paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any
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tax-exempt distributions attributable to interest on certain "private activity
bonds," if any, received by a Portfolio may constitute a tax preference items
and may give rise to, or increase liability under, the alternative minimum tax
for particular unitholders. In addition, tax-exempt distributions of the
Portfolios may be considered in computing the "adjusted current earnings"
preference item of their corporate unitholders in determining the corporate
alternative minimum tax. To the extent that the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios invest in certain short-
term instruments, including repurchase agreements, the interest on which is not
exempt from Federal income tax, or earn other taxable income any distributions
of income from such investments or other taxable income will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry units of the
Portfolio will generally not be deductible. The availability of tax-exempt
obligations and the value of the Portfolios may be affected by restrictive tax
legislation enacted in recent years.
In purchasing municipal obligations, the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios rely on opinions of nationally-
recognized bond counsel for each issue as to the excludability of interest on
such obligations from gross income for federal income tax purposes and, where
applicable, the tax-exempt nature of such interest under the personal income tax
laws of a particular state. These Portfolios do not undertake independent
investigations concerning the tax-exempt status of such obligations, nor do they
guarantee or represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in units or in cash. Unitholders
electing to receive distributions in the form of additional units will have a
cost basis in each unit so received equal to the amount of cash they would have
received had they elected to receive cash.
Certain Portfolios may be subject to foreign withholding taxes or other
foreign taxes with respect to their investments in certain securities of foreign
entities. These taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties in some cases, and each Portfolio intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although no Portfolio anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by a portfolio,
that a Portfolio could make an election under Code Section 853 to permit its
unitholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by that Portfolio in foreign
countries. In the event such an election is made, unitholders will be required
to include their pro rata share of such taxes in gross income and may be
entitled to claim a foreign tax credit or deduction with respect to such taxes,
subject to certain
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limitations under the Code. Unitholders who are precluded from taking such
credits or deductions will nevertheless be taxed on their pro rata share of the
foreign taxes included in their gross income, unless they are otherwise exempt
from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt unitholders. Under
the backup withholding provisions of Code Section 3406, all such distributions
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt unitholders who fail to furnish the Portfolio with their
taxpayer identification number and with certain certifications required by the
Internal Revenue Service or if the Internal Revenue Service or a broker notifies
a Portfolio that the number furnished by the unitholder is incorrect or that the
unitholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from the Tax-
Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
will not be subject to backup withholding if the applicable Portfolio reasonably
estimates that at least 95% of its distributions will be exempt-interest
dividends. The Portfolios may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct, if applicable, or that the investor is an exempt
recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in units, will be reduced by
the amounts required to be withheld. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.
Redemptions (including exchanges) and other dispositions of units in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Portfolios successfully
maintain a constant net asset value per share, but a loss may be recognized to
the extent a CDSC is imposed on the redemption or exchange of ILA Class B Units.
All or a portion of such a loss may be disallowed under applicable code
provisions in certain circumstances. Unitholders should consult their own tax
advisors with reference to their circumstances to determine whether a
redemption, exchange, or other disposition of Portfolio Units is properly
treated as a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder who is required to file a
federal income tax return. The Portfolios will inform unitholders of the
federal income tax status of their distributions after the end of each calendar
year, including, in the case of the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, the amounts that qualify as
exempt-interest dividends and any portions of such amounts that constitute tax
preference items under the federal alternative minimum tax. Unitholders who
receive exempt-interest dividends and have not held their units of the
applicable Portfolio for its entire taxable year may have designated as tax-
exempt or as
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a tax preference item a percentage of their distributions which is not exactly
equal to a proportionate share of the amount of tax-exempt interest or tax
preference income earned during the period of their investment in such
Portfolio. Each unitholder should consult his or her own tax advisor to
determine the tax consequences of an investment in a Portfolio in the
unitholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Unitholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each unitholder who is not a U.S. person should consult his or
her tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of
units of a Portfolio, including the possibility that such a unitholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Portfolio and, if a current IRS Form W-8 or acceptable substitute is not
on file with the Portfolio, may be subject to backup withholding on certain
payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of a Portfolio
and its unitholders under such laws may differ from their treatment under
Federal income tax laws, and an investment in the Portfolios may have tax
consequences for unitholders that are different from those of a direct
investment in the Portfolios' securities. Unitholders should consult their own
tax advisers concerning these matters. For example, in such states or
localities it may be appropriate for unitholders to review with their tax
advisers the state income and, if applicable, intangible property tax
consequences of investments by the Portfolios in securities issued by the
particular state or the U.S. Government or its various agencies or
instrumentalities, because many states (i) exempt from personal income tax
distributions made by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or (ii) exempt from intangible property tax the value of the units of such
companies attributable to such obligations, subject to certain state-specific
requirements and/or limitations. See also the discussion below of these
applicable provisions in California and New York.
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Provided that the Portfolios qualify as regulated investment companies and
incur no federal income tax liability, the Portfolios may still be subject to
New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends 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
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as long-term capital loss to the extent of such long-term capital gains
distribution. Finally, any loss realized upon the redemption of units within
thirty days before or after the acquisition of other units of the same Portfolio
may be disallowed under the "wash sale" rules.
New York City and State Taxation. Individual unitholders who are residents
of New York State will be able to exclude for New York State income tax purposes
that portion of the exempt-interest dividends properly designated as such from
the Tax-Exempt New York Portfolio which is derived from interest on obligations
of New York State and its political subdivisions and obligations of Puerto Rico,
the U.S. Virgin Islands and Guam. Exempt- interest dividends may be properly
designated as such only if, as anticipated, at least 50% of the value of the
assets of the Portfolio are invested at the close of each quarter of its taxable
year in obligations of issuers the interest on which is excluded from gross
income for federal income tax purposes. Individual unitholders who are
residents of New York City will also be able to exclude such income for New York
City income tax purposes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Tax-Exempt New York Portfolio is
not deductible for New York State or New York City personal income tax purposes.
Long-term capital gains, if any, that are distributed by the Tax-Exempt New
York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents.
Unitholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
This discussion of the tax treatment of the Portfolio and its unitholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information.
ORGANIZATION AND CAPITALIZATION
The Portfolios were reorganized from series of a Massachusetts business Trust
as part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of units exists,
each class or series must be preferred over all other classes or series in
respect of assets specifically allocated to such class or series. The Trustees
also have authority to classify and reclassify any series of units into one or
more classes of units. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of up to three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have
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authorized a fourth 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 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
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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, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding units of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
When issued units are fully paid and non-assessable. In the event of
liquidation, unitholders are entitled to share pro rata in the net assets of the
applicable class of the relevant Portfolio available for distribution to such
unitholders. All units entitle their holders to one vote per unit, are freely
transferable and have no preemptive subscription or conversion rights.
The Trust is not required to hold annual meetings of unitholders and does not
intend to hold such meetings. In the event that a meeting of unitholders is
held, each unit of the Trust will be entitled, as determined by the Trustees,
either to one voter for each unit or to one vote for each dollar of net asset
value represented by such units on all matters presented to unitholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote separately
from each other. Unitholders of the Trust do not have cumulative voting rights
in the election of Trustees. Meetings of unitholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the units entitled to vote at
such meetings. The unitholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers
and agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of
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any series is held personally liable solely by reason of being or having been a
shareholder and not because of the shareholder's acts or omissions or for some
other reason, the shareholder or former shareholder (or heirs, executors,
administrators, legal representatives or general successors) shall be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust acting on behalf of any affected series, must, upon
request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment
thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series
or classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were
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Duquesne Capital Management, Inc., 2579 Washington Rd. Ste. 322, Pittsburgh, PA
15241-2563 (5.45%); Harris Trust & Savings Bank, 200 W. Monroe Street, 12th
Floor, Chicago, IL 60606-5509 (8.36%); United Missouri Bank of Kansas City, PO
Box 419692, Kansas City 64141-6692 (5.63%); and VF Corporation, 1047 North Park
Road, Wyomissing, PA 19610 (6.85%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were Bank of New York, 48 Wall
Street, New York, NY 10286 (20.40%) and Stone Street & Bridge Street Funds, 85
Broad Street, 4th Floor, New York, NY 10004-2434 (9.52%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (6.83%); Bankers Trust
Company, PO Box 897, Des Moines, IA 50304-0897 (5.98%); First National Bank of
Omaha, PO Box 3128, Omaha, NE 68103-0128 (15.24%; Firstar Bank Madison, N.A.,
PO Box 7900, Madison, WI 53707-7900 (8.18%) and National City Bank Kentucky,
4100 W. 150th Street, 3rd Floor N. Annex, Cleveland, OH 44135 (7.485%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (32.49%); Emerald
Partners, 237 Park Avenue Ste. 801, New York, NY 10017-3142 (5.18%); and Morgan
Stanley, 2 No. LaSalle Street, Ste. 500, Chicago, IL 60602 (7.48%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were American Exploration Co.,
1331 Lamar Street, Ste. 900, Houston, TX 77010-3027 (9.82%); Comerica Bank, PO
Box 55-519, Detroit, MI 48255-0499 (11.06%); Morgan Stanley, 2 No. LaSalle
Street, Ste. 500, Chicago, IL 60602 (7.86%); Northern Trust, 50 South LaSalle
Street, Chicago, IL 60675 (6.43%); State Street Bank & Trust Co., PO Box 1992,
Boston, MA 02105-1992 (6.55%); United Missouri Bank of Kansas City, PO Box
419692, Kansas City, MO 64141-6692 (5.19%); and Wells Fargo Bank, 26610 Agoura
Rd., Calabasas, CA 91302-1954 (7.00%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were Bank of New York, 48
Wall Street, New York, NY 10286 (20.62%); Marine Midland Bank, PO Box 4203,
Buffalo, NY 14240 (7.48%); Shames Trust Accounts, 57 Holly Place, Briarcliff,
NY 10510-2107 (9.01%) and Stephen Apkon & Lisa Hertz Apkon, 33 Ashland Ave.,
Pleasantville, NY 10570-2301 (8.36%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt California Portfolio were Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee & Reiko-
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Takahashi Joint Tenants, 26541 Taaffe Road, Los Altos, CA 94022-4313.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Federal Portfolio was Bank of New York, 48 Wall Street,
New York, NY 10286 (10.46%); and The Baupost Group, Inc., PO Box 389125,
Cambridge, MA 02238-9998 (5.95%).
As of April 1, 1997, the only holders of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee, Los Altos, CA 94022-4313 (5.45%).
UNITHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the unitholders of the Portfolios are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust unitholder liability exists
in many other states. As a result, to the extent that a Delaware business trust
or a unitholder is subject to the jurisdiction of courts of such other states,
the courts may not apply Delaware law and may thereby subject the Delaware
business trust unitholders to liability. To guard against this risk, the
Declaration of Trust contains express disclaimer of unitholder liability for
acts or obligations of a Portfolio. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
Portfolio or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Portfolio for all loss suffered by a unitholder as a result of
an obligation of the Portfolio. The Declaration of Trust also provides that a
Portfolio shall, upon request, assume the defense of any claim made against any
unitholder for any act or obligation of the Portfolio and satisfy any judgment
thereon. In view of the above, the risk of personal liability of unitholders is
remote.
In addition to the requirements set forth under the Declaration of Trust, the
Trust provides that unitholders may bring a derivative action on behalf of the
Trust only if the following conditions are met: (a) unitholders eligible to
bring such derivative action under Delaware law who hold at least 10% of the
outstanding units of the Portfolio, or 10% of the outstanding units of the class
to which such action relates, shall join in the request for the Trustees to
commence such action; and (b) the Trustees must be afforded a reasonable amount
of time to consider such unitholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain counsel or other advisers in
considering the merits of the request and shall require an undertaking by the
Unitholders making such request to
78
<PAGE>
reimburse the Portfolio for the expense of any such advisers in the event that
the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the Portfolios' assets. In that capacity, State Street maintains
the accounting records and calculates the daily net asset value per unit of the
Portfolios. Its mailing address is P.O. Box 1713, Boston, MA 02105. State
Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International Place,
Boston, MA 02110, have been selected as auditors of the Trust. In addition to
audit services, Arthur Andersen LLP prepares the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Portfolios, including the Statements of
Investments as of December 31, 1996, the Statements of Assets and Liabilities as
of December 31, 1996, the related Statements of Operations for the period then
ended, the Statements of Changes in Net Assets and the Financial Highlights for
the periods presented, the Notes to the Financial Statements, and the Report of
Independent Public Accountants, all of which are included in the 1996 Annual
Report to the unitholders, are attached hereto and incorporated by reference
into this Statement of Additional Information.
79
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report
- --------------------------------------------------------------------------------
Dear Unitholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Institutional Liquid
Assets (ILA) Portfolios in 1996. It has been another positive year for ILA in
which the Portfolios did well compared with their respective IBC Financial Data,
Inc. averages while adhering to their conservative investment guidelines.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) reported at 2.0% annualized. Growth was more
dramatic during the second quarter, as industrial activity and automobile and
home sales all showed significant improvement, pushing real GDP to 4.7%, its
highest rate in two years. That growth rate caused some to expect the Fed to
change direction and tighten before year-end. However, the economy subsequently
moderated significantly, with third-quarter annualized real GDP retreating to
2.1%, reflecting lackluster consumer spending and a widening U.S. trade deficit.
As 1996 drew to a close, moderate economic growth and contained inflation kept
the Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
portfolios' weighted average maturities and structures were equally important to
our strategy.
During the second and third quarters of 1996, we extended the ILA
Portfolios' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Portfolios closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for ILA Portfolios Institutional Units* as of December 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------
Weighted
Institutional SEC 7-Day SEC 7-Day 30-Day Average
Liquid Assets Current Effective Average Maturity
Portfolios Yield Yield Yield (days)
=========================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.12% 5.25% 5.10% 40
---------------------------------------------------------
Money Market 5.20% 5.33% 5.18% 43
---------------------------------------------------------
Government 5.19% 5.32% 5.07% 31
---------------------------------------------------------
Treasury
Obligations 5.19% 5.32% 5.06% 34
---------------------------------------------------------
Treasury
Instruments 4.84% 4.95% 4.98% 54
---------------------------------------------------------
Federal 5.15% 5.28% 5.12% 41
---------------------------------------------------------
Tax-Exempt
Diversified 3.58% 3.64% 3.30% 39
---------------------------------------------------------
Tax-Exempt
California 3.47% 3.53% 3.11% 34
---------------------------------------------------------
Tax-Exempt
New York 3.52% 3.58% 3.19% 34
---------------------------------------------------------
</TABLE>
* ILA offers three separate classes of units (Institutional, Administration and
Service), each of which is subject to different fees and expenses that affect
performance and entitle unitholders to different services. The Administration
units and the Service units offer financial institutions the opportunity to
receive a fee for providing administrative support services. The Administration
units pay 0.15% plus 0.10% from the adviser for a total of 0.25%. The Service
units pay 0.40% plus 0.10% from the adviser for a total of 0.50%. More complete
information, including management fees and expenses, is included in the ILA
Portfolios' prospectus or may be obtained by calling the Goldman Sachs Funds at
1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy
Economy and a Strong Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from
- --------------------------------------------------------------------------------
2
<PAGE>
the Orange County bankruptcy abated somewhat, although various forms of credit
enhancement remained popular, even among high-quality issuers. Reflecting the
strong national economy, many states and localities experienced positive
financial results, reducing their regular cash flow borrowings.
The Credit Picture Abroad: Europe Improved,
While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks. In Asia,
creditworthiness was fairly stable. The notable negative exception was the
Japanese financial sector, which remained under pressure from the ongoing
weakness of the real estate markets, sluggish economic growth and ongoing
deregulation. However, Japan's largest banks have strong fundamentals and will
continue to be important and dominant players in the global financial market.
Australian credit quality strengthened through improved macroeconomic balances,
which provided evidence that Australia's recent boom-and-bust cycles may be
over. The weakness of Asian exports did not affect creditworthiness directly;
exports should recover this year, and the scare could prompt salutary policy
adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market portfolios. The Goldman Sachs Credit Department, which has analysts based
in London, Tokyo, Frankfurt and New York, as well as extensive technological
assets and credit expertise, will continue to vigilantly monitor global
developments in 1997.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, ILA Portfolios will continue to be managed with
short-to-neutral average life targets and short, ddered structures to prepare
for higher rates ahead.
Extended Trading Hours Improve Service Further
On November 4, 1996, we extended the trading hours for the Institutional
Liquid Assets Federal and Treasury Instruments Portfolios to 3:00 p.m. EST. Many
clients have already taken advantage of this additional flexibility.
In closing, we thank you for your support and for making 1996 a successful
year for the ILA Portfolios. We are pleased that many of you have joined our
conference calls following each Federal Open Market Committee meeting throughout
the year. Our goal is to continue to provide you with competitive performance,
as well as a range of value-added services that reflect the breadth and depth of
Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
3
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Commercial Paper and Corporate Obligations--60.5%
Bank Holding Companies
BankAmerica Corp.
$50,000,000 5.27% 03/21/97 $ 49,421,764
Business Credit Institutions
General Electric Capital Corp.
20,000,000 5.30 03/26/97 19,752,667
30,000,000 5.44 04/03/97 29,582,933
JC Penney Funding Corp.
44,300,000 5.31 01/31/97 44,103,973
Chemicals
Bayer Corp.
25,000,000 5.33 03/13/97 24,737,201
Commercial Banks
CP Trust Certificates Series 1996
35,000,000 5.94/(a)/ 03/28/97 35,000,000
Life Insurance
Commonwealth Life Insurance Co.
55,000,000 6.11/(b)/ 05/08/97 55,000,000
Pacific Mutual Life Insurance Co.
25,000,000 5.52/(b)/ 02/28/97 25,000,000
Prudential Funding Corp.
40,000,000 5.42 01/29/97 39,831,378
Motor Vehicles and Equipment
Ford Motor Credit Corp.
20,000,000 5.50 01/28/97 19,917,500
Hertz Corporation
25,000,000 5.32 02/04/97 24,874,389
Personal Credit Institutions
Associates Corp.
50,000,000 5.32 01/29/97 49,793,111
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
20,000,000 5.43 01/29/97 19,915,533
Receivable/Asset Financings
Beta Finance Inc.
7,000,000 6.11 06/17/97 7,000,000
Delaware Funding Corp.
30,000,000 5.29 02/20/97 29,779,583
Enterprise Funding Corp.
10,062,000 5.33 01/21/97 10,032,205
9,103,000 5.33 01/23/97 9,073,350
International Lease Finance Corp.
9,000,000 5.29% 03/24/97 $ 8,891,555
30,000,000 5.32 04/04/97 29,587,700
New Center Asset Trust
10,000,000 5.52 01/28/97 9,958,600
10,000,000 5.37 04/04/97 9,861,275
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
40,000,000 5.30 02/13/97 39,746,778
10,000,000 5.34 03/12/97 9,896,167
C.S. First Boston, Inc.
15,000,000 5.33 01/22/97 14,953,363
Merrill Lynch & Co., Inc.
10,000,000 5.45 02/19/97 9,925,819
40,000,000 5.33 02/26/97 39,668,356
Morgan Stanley Group, Inc.
10,000,000 5.59 01/28/97 9,958,075
15,000,000 5.32 02/06/97 14,920,200
25,000,000 5.79/(a)/ 06/27/97 25,000,000
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $764,666,253
- -----------------------------------------------------------
Bank Notes--10.7%
Colorado National Bank
$25,000,000 5.59%/(b)/ 01/15/97 $ 24,999,810
FCC National Bank
15,000,000 5.70 05/22/97 14,982,722
20,000,000 6.00 06/02/97 20,000,808
Huntington National Bank
25,000,000 6.05 06/13/97 25,014,637
PNC Bank, N.A.
40,000,000 5.58/(b)/ 04/01/97 39,992,313
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
- -----------------------------------------------------------
Total Bank Notes $134,990,290
- -----------------------------------------------------------
U.S. Government Agency Obligations--1.6%
Federal National Mortgage Association
$20,400,000 5.36% 03/12/97 $ 20,187,386
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $ 20,187,386
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit--9.5%
Chase Manhattan Corp.
$ 10,000,000 5.75% 02/03/97 $ 10,000,000
40,000,000 5.42 03/12/97 40,000,000
First Alabama Bank
20,000,000 5.55 02/28/97 19,999,973
Mellon Bank, N.A.
40,000,000 5.35 02/19/97 40,000,000
Union Bank of California
10,000,000 5.58 02/28/97 10,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 119,999,973
- -----------------------------------------------------------
Repurchase Agreements--17.9%
C.S. First Boston Corp., dated 12/31/96, repurchase
price $50,465,000 (FNMA: $51,588,373, 6.12%-6.23%,
02/01/32-10/01/32)
$ 50,000,000 5.40% 03/03/97 $ 50,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $100,036,111 (U.S. Treasury Bond: $53,861,960,
11.25%, 02/15/15; FHLB Stripped Security:
$48,746,508, 06/23/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $25,213,750 (FNMA: $9,152,917, 7.50%,
04/01/26; FHLMC: $17,073,692, 7.50%, 11/01/26)
25,000,000 5.40 02/26/97 25,000,000
Smith Barney, Inc., dated 12/31/96, repurchase price
$30,257,450 (FHLMC: $31,328,053, 7.00%,
06/01/26-11/01/26)
30,000,000 5.42 02/26/97 30,000,000
Joint Repurchase Agreement Account
21,400,000 6.58 01/02/97 21,400,000
- -----------------------------------------------------------
Total Repurchase Agreements $ 226,400,000
- -----------------------------------------------------------
Total Investments $1,266,243,902/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Money Market Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--48.5%
Business Credit Institutions
General Electric Capital Corp.
$15,000,000 5.44% 04/03/97 $ 14,791,467
Commercial Banks
CP Trust Certificates Series 1996
20,000,000 5.68/(a)/ 03/28/97 20,000,000
Computer Software and Services
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
Banca Crt Financial Corp.
10,000,000 5.35 01/22/97 9,968,792
5,000,000 5.35 01/31/97 4,977,708
17,430,000 5.45 03/03/97 17,269,039
5,400,000 5.42 04/03/97 5,325,204
Generale Bank
15,000,000 5.35 04/10/97 14,779,313
San Paolo U.S. Finance Co.
25,000,000 5.36 01/31/97 24,888,333
15,000,000 5.33 02/13/97 14,904,504
Unifunding, Inc.
40,000,000 5.45 01/29/97 39,830,444
Home Builders
International Lease Finance Corp.
40,000,000 5.43 03/07/97 39,607,833
Life Insurance
Commonwealth Life Insurance Co.
25,000,000 5.64/(b)/ 05/08/97 25,000,000
Prudential Funding Corp.
10,000,000 5.42 01/29/97 9,957,844
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
25,000,000 5.35 03/25/97 24,691,631
Ford Motor Credit Co.
40,000,000 5.32 02/04/97 39,799,022
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
35,000,000 5.30 02/13/97 34,778,431
Merrill Lynch & Co., Inc.
40,000,000 5.35 02/11/97 39,756,278
Morgan Stanley Group, Inc.
20,000,000 5.32 02/06/97 19,893,600
20,000,000 5.53/(a)/ 06/27/97 20,000,000
Nomura Holdings
35,000,000 5.39 01/29/97 34,853,272
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $479,913,854
- -----------------------------------------------------------
Bank Notes--15.1%
Colorado National Bank
$15,000,000 5.59%/(b)/ 01/15/97 $ 14,999,886
Dakota Certificates of Standard Credit Card Master Trust
20,000,000 5.33/(b)/ 02/07/97 19,890,439
FCC National Bank, Wilmington
10,000,000 5.70 05/22/97 9,988,481
First Bank FSB
5,000,000 5.61/(b)/ 04/11/97 4,999,734
First National Bank of Maryland
5,000,000 5.60/(b)/ 09/30/97 4,998,547
Huntington National Bank
5,000,000 6.05 06/13/97 4,998,229
PNC Bank, N.A.
10,000,000 5.58/(b)/ 04/01/97 9,998,078
20,000,000 5.40/(b)/ 10/01/97 19,988,244
Society National Bank of Cleveland
25,000,000 5.58/(b)/ 05/14/97 24,990,309
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54/(b)/ 05/15/97 24,995,313
- -----------------------------------------------------------
Total Bank Notes $149,847,260
- -----------------------------------------------------------
Certificates of Deposit--0.5%
Chase Manhattan Corp.
$ 5,000,000 5.75% 02/03/97 $ 5,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 5,000,000
- -----------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$40,000,000 5.49% 03/18/97 $ 40,000,830
Sanwa Bank Ltd., London
35,000,000 5.46 03/21/97 35,000,377
- -----------------------------------------------------------
Total Certificates of Deposit - Foreign
Eurodollar $ 75,001,207
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ----------------------------------------------------------
ILA Money Market Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit - Yankeedollar--9.1%
Industrial Bank of Japan, New York
$35,000,000 5.46% 03/19/97 $ 35,000,368
Landesbank Hessen Thuer Gir, New York
30,000,000 6.03 06/13/97 30,036,531
Sumitomo Bank, Los Angeles
25,000,000 5.52 02/28/97 24,998,171
- -----------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 90,035,070
- -----------------------------------------------------------
Taxable Municipal Notes--2.9%
Florida Housing Finance Authority
$28,800,000 5.92%/(b)/ 01/01/34 $ 28,800,000
- -----------------------------------------------------------
Total Taxable Municipal Notes $ 28,800,000
- -----------------------------------------------------------
Time Deposit--3.6%
Bank of Tokyo, Mitsubishi Bank Ltd.
$35,000,000 5.50% 05/16/97 $ 35,000,000
- -----------------------------------------------------------
Total Time Deposit $ 35,000,000
- -----------------------------------------------------------
Repurchase Agreements--12.9%
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $50,018,056 (FHLMC: $52,044,149, 7.26%,
09/17/01)
$50,000,000 6.50% 01/02/97 $ 50,000,000
Joint Repurchase Agreement Account
77,200,000 6.58 01/02/97 77,200,000
- -----------------------------------------------------------
Total Repurchase Agreements $127,200,000
- -----------------------------------------------------------
Total Investments $990,797,391/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Government Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
U.S. Government Agency Obligations--31.2%
Federal Home Loan Bank
$ 25,000,000 5.35% 01/30/97 $ 24,892,257
50,000,000 5.40/(a)/ 04/04/97 49,988,154
25,000,000 5.45 11/12/97 24,977,221
10,000,000 5.42 12/02/97 9,986,619
25,000,000 5.50/(a)/ 12/26/97 24,979,592
Federal National Mortgage Association
30,000,000 6.50 01/02/97 29,994,583
15,000,000 4.72/(a)/ 01/27/97 14,999,007
20,000,000 5.41/(a)/ 09/29/97 19,992,616
7,500,000 5.53 10/29/97 7,497,075
50,000,000 5.40/(a)/ 12/03/97 49,968,600
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $257,275,724
- -----------------------------------------------------------
U.S. Treasury Obligations--3.0%
United States Treasury Notes
$ 20,000,000 5.63% 06/30/97 $ 19,965,941
5,000,000 6.00 09/02/97 4,999,214
- -----------------------------------------------------------
Total U.S. Treasury Obligations $ 24,965,155
- -----------------------------------------------------------
Repurchase Agreements--66.1%
Bear Stearns Companies, Inc. dated 12/31/96, repurchase
price $30,011,333 (FNMA: $30,894,721, 8.50%, 09/01/25)
$ 30,000,000 6.80% 01/02/97 $30,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase
price $30,403,125 (FHLM: $31,559,521, 7.00%, 11/01/26)
30,000,000 5.38 03/11/97 30,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$30,011,500 (U.S. Treasury Bill: $30,600,013, 11/13/97)
30,000,000 6.90 01/02/97 30,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$30,403,125 (FNMA: $30,964,228, 6.12%, 10/01/32)
30,000,000 5.38 03/11/97 30,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase
price $30,403,125 (FNMA: $31,531,603, 8.00%, 06/01/26)
30,000,000 5.38 03/12/97 30,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (U.S. Treasury Stripped
Security: $22,193,561, 11/15/99; U.S. Treasury
Notes: $8,408,442, 7.75%-8.88%, 2/15/00-2/15/01)
30,000,000 7.10 01/02/97 30,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (FNMA: $30,385,501, 5.28%,
06/01/24)
30,000,000 7.10 01/02/97 30,000,000
Repurchase Agreements (continued)
Nomura Securities International, Inc., dated 12/31/96,
repurchase price $30,012,500 (FHLM: $30,924,339,
6.50%-8.00%, 01/01/00-09/01/11)
$ 30,000,000 7.50% 01/02/97 $ 30,000,000
Joint Repurchase Agreement Account
305,000,000 6.58 01/02/97 305,000,000
- -----------------------------------------------------------
Total Repurchase Agreements $545,000,000
- -----------------------------------------------------------
Total Investments $827,240,870/(b)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/(b)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Treasury Obligations Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--9.6%
United States Treasury Notes
$40,000,000 5.63% 06/30/97 $39,932,792
27,500,000 5.38 12/01/97 27,459,792
10,000,000 5.25 12/31/97 9,975,384
- -----------------------------------------------------------
Total U.S. Treasury Obligations $77,367,968
- -----------------------------------------------------------
Repurchase Agreements--90.8%
Bear Stearns Companies Inc., dated 12/31/96, repurchase
price $35,013,125 (U.S. Treasury Note: $35,659,606,
8.75%, 8/15/00)
$35,000,000 6.75% 01/02/97 $35,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$30,399,750 (U.S. Treasury Note: $30,748,620, 7.50%,
11/15/01)
30,000,000 5.33 03/13/97 30,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase
price $35,013,028 (U.S. Treasury Bond: $35,702,267,
8.50%, 02/15/20)
35,000,000 6.70 01/02/97 35,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$35,013,417 (U.S. Treasury Bill: $35,700,492, 11/13/97)
35,000,000 6.90 01/02/97 35,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$35,012,833 (U.S. Treasury Note: $35,700,497, 7.25%,
02/15/98)
35,000,000 6.60 01/02/97 35,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $35,012,833 (U.S. Treasury Note: $35,838,260,
7.38%, 11/15/97)
35,000,000 6.60 01/02/97 35,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $35,013,806 (U.S. Treasury Stripped
Securities: $35,703,063, 02/15/00-11/15/00)
35,000,000 7.10 01/02/97 35,000,000
Merrill Lynch Government Securities, Inc., dated
12/31/96, repurchase price $35,012,542 (U.S. Treasury
Stripped Securities: $35,702,128, 02/15/02-02/15/26)
35,000,000 6.45 01/02/97 35,000,000
Nomura Securities International, Inc., dated 12/12/96,
repurchase price $30,400,500 (U.S. Treasury Notes:
$30,600,339, 5.13%-8.50%, 04/15/97-08/15/01)
30,000,000 5.34 03/12/97 30,000,000
Sanwa Securities, dated 12/31/96, repurchase price
$35,013,125 (U.S. Treasury Note: $36,039,356, 8.50%,
2/15/00)
35,000,000 6.75 01/02/97 35,000,000
Smith Barney Inc., dated 12/11/96, repurchase price
$30,400,500 (U.S. Treasury Notes: $28,942,094,
5.38%-6.88%, 05/15/97-07/31/99; U.S. Treasury Stripped
Security: $1,658,209, 02/15/00)
30,000,000 5.34 03/11/97 30,000,000
UBS Securities Inc., dated 12/31/96, repurchase price
$35,013,368 (U.S. Treasury Note: $35,676,249, 6.00%,
09/30/98)
35,000,000 6.88 01/02/97 35,000,000
Joint Repurchase Agreement Account
327,900,000 6.58 01/02/97 327,900,000
- -----------------------------------------------------------
Total Repurchase Agreements $732,900,000
- -----------------------------------------------------------
Total Investments $810,267,968/(a)/
===========================================================
</TABLE>
/(a)/The amount stated also represents aggregate cost for
federal income tax purposes.
Interest rates represent either the stated coupon rate,
annualized yield on date of purchase for discounted notes,
or, for floating rate securities, the current reset rate,
which is based upon current interest rate indices.
The percentages shown for each investment category reflect
the value of investments in that category as a percentage
of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Treasury Instruments Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Treasury Obligations--99.3%
United States Treasury Bills
$25,000,000 4.72% 01/30/97 $ 24,904,944
5,500,000 4.95 01/30/97 5,478,069
75,000,000 4.80 02/06/97 74,640,000
48,600,000 4.83 02/06/97 48,365,262
14,500,000 4.86 02/06/97 14,429,530
32,100,000 5.41 02/06/97 31,942,389
90,000,000 4.95 02/06/97 89,554,500
75,000,000 4.82 02/13/97 74,568,208
150,000,000 5.03 02/13/97 149,098,792
10,500,000 4.86 02/27/97 10,419,203
21,500,000 4.90 02/27/97 21,333,196
28,400,000 4.94 02/27/97 28,177,865
United States Treasury Notes
30,000,000 6.25 01/31/97 30,025,345
50,000,000 7.50 01/31/97 50,097,656
50,000,000 4.75 02/18/97 49,961,310
312,000,000 6.88 02/28/97 312,866,648
205,000,000 6.63 03/31/97 205,703,323
- ------------------------------------------------------------
Total U.S. Treasury Obligations $1,221,566,240
- ------------------------------------------------------------
Total Investments $1,221,566,240/(a)/
============================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Federal Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Government Agency Obligations--100.3%
Federal Farm Credit Bank
$ 20,515,000 5.36% 01/02/97 $ 20,511,946
37,635,000 5.58 01/06/97 37,605,833
2,400,000 5.58 01/07/97 2,397,767
27,300,000 5.26-5.27 01/13/97 27,252,072
36,345,000 5.35 01/15/97 36,269,382
56,000,000 5.37 01/21/97 55,832,933
42,000,000 5.37 01/23/97 41,862,170
9,750,000 5.50 01/27/97 9,711,271
11,490,000 5.48 01/31/97 11,437,529
212,210,000 5.23-5.41/(a)/ 02/03/97 212,075,061
44,895,000 5.21 02/04/97 44,674,092
24,000,000 5.33 02/06/97 23,872,080
20,545,000 5.21-5.33 02/10/97 20,424,201
10,000,000 5.20 02/14/97 9,936,444
79,055,000 5.21-5.39 02/18/97 78,494,540
14,830,000 5.22 02/21/97 14,720,332
50,635,000 5.21-5.33 02/26/97 50,216,604
17,000,000 5.21 02/27/97 16,859,764
16,000,000 5.21 02/28/97 15,865,698
51,610,000 5.22-5.32 03/03/97 51,423,313
8,000,000 5.32 03/10/97 7,919,609
7,180,000 5.21 03/11/97 7,108,302
50,000,000 5.48/(b)/ 03/11/97 49,992,224
6,200,000 5.21 03/12/97 6,137,191
20,000,000 5.36 03/25/97 19,752,844
19,000,000 5.32-5.36 03/26/97 18,762,747
9,000,000 5.32 03/27/97 8,886,950
11,000,000 5.32 03/31/97 10,855,325
17,000,000 5.30 04/01/97 16,774,750
50,000,000 5.52/(b)/ 05/21/97 49,981,445
50,000,000 5.84 06/18/97 49,958,175
10,000,000 5.37/(b)/ 06/26/97 9,996,868
50,000,000 5.49/(b)/ 08/26/97 49,972,764
50,000,000 5.36/(b)/ 10/02/97 49,959,775
Federal Home Loan Bank
5,100,000 5.22 01/02/97 5,099,261
50,000,000 5.38/(b)/ 01/03/97 49,999,747
17,895,000 5.24 01/16/97 17,855,929
34,900,000 5.23 01/23/97 34,788,562
25,000,000 5.28 01/28/97 24,901,000
133,300,000 5.22-5.35 01/30/97 132,733,719
25,130,000 5.28 01/31/97 25,019,533
181,845,000 5.21-5.32 02/13/97 180,701,332
28,750,000 5.21-5.26 02/14/97 28,566,649
145,815,000 5.20% 02/20/97 144,761,891
34,300,000 5.31 02/21/97 34,041,978
125,320,000 5.20-5.21 02/27/97 124,287,275
27,680,000 5.21 03/06/97 27,423,622
101,750,000 5.23 03/13/97 100,700,477
35,000,000 5.35 03/27/97 34,557,882
50,000,000 5.51/(b)/ 03/27/97 49,989,790
80,000,000 5.35 03/31/97 78,941,889
100,000,000 5.22/(b)/ 04/01/97 99,981,167
25,000,000 5.84 06/27/97 24,976,809
50,000,000 5.51/(b)/ 08/28/97 49,977,691
65,000,000 5.50/(b)/ 09/26/97 64,962,440
50,000,000 5.50/(b)/ 12/26/97 49,959,182
Student Loan Marketing Association
75,000,000 5.41 10/02/97 74,972,733
74,000,000 5.46 11/10/97 73,963,185
Tennessee Valley Authority
40,000,000 5.21 01/24/97 39,866,856
47,975,000 5.21 02/05/97 47,731,993
47,300,000 5.21 02/06/97 47,053,567
87,385,000 5.20-5.22 02/19/97 86,765,491
75,000,000 5.17 02/20/97 74,461,458
75,000,000 5.17 02/21/97 74,450,688
60,840,000 5.26-5.31 02/25/97 60,347,412
20,000,000 5.23 03/21/97 19,770,461
106,885,000 5.28 03/26/97 105,568,177
75,000,000 5.25 04/09/97 73,928,125
- ------------------------------------------------------------
Total Investments $3,300,609,972/(c)/
============================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio
December 31, 1996
- --------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
==============================================================
Alabama--6.4%
Columbia IDB PCRB Series 1996 A for Alabama Power Co.
(VMIG1)
$21,000,000 5.00% 01/01/97 $21,000,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 B
(A-1/VMIG1)/(c)/
23,500,000 5.00 01/01/97 23,500,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 C
(A-1/VMIG1)
4,600,000 4.65 01/01/97 4,600,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 E
(A-1/VMIG1)
4,900,000 5.10 01/01/97 4,900,000
Homewood RB for Samford University (Bank of Nova Scotia
LOC) (A-1+/VMIG1)
16,000,000 5.00 01/01/97 16,000,000
Jefferson County Sewer Revenue Warrants Series 1995 A
(Bayerische Landesbank Girozentrale LOC)(A-1+/P-1)
19,300,000 4.25 01/07/97 19,300,000
Mobile County IDA PCRB for M&T Chemicals (Bankers Trust
LOC) (A1)
3,000,000 4.13 01/01/97 3,000,000
Mobile IDA PCRB for Alabama Power Co. Series
1993A(A-1/VMIG1)
8,600,000 4.15 01/01/97 8,600,000
Mobile IDA PCRB for Alabama Power Co. Series
1994(A-1/VMIG1)
2,100,000 5.00 01/01/97 2,100,000
- -----------------------------------------------------------
$103,000,000
- -----------------------------------------------------------
Alaska--0.2%
Valdez Marine Terminal RB for Arco, Inc. Series 1994
C(A-1/P-1)
$ 2,600,000 3.60% 04/10/97 $ 2,600,000
- -----------------------------------------------------------
Arkansas--1.2%
Crossett PCRB for Georgia Pacific Corp. Series 1991
VRDN
(Suntrust Bank LOC)(A-1+/AA3)
$ 9,500,000 4.15% 01/07/97 $ 9,500,000
Union County PCRB Series 1988 for Great :Lakes Chemical
(A-1)
9,000,000 4.21/(b)/ 01/07/97 9,000,000
- -----------------------------------------------------------
$18,500,000
- -----------------------------------------------------------
California--5.8%
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
$ 6,000,000 3.47% 01/31/97 $ 6,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
12,000,000 4.00 01/07/97 12,000,000
California Statewide Communities Development Authority
Refunding RB Series 1995(A-1+)/(c)/
$ 9,300,000 3.90% 01/07/97 $ 9,300,000
California Statewide Communities Development Authority
Refunding RB Series 1995A-2(A-1+)
2,500,000 3.90 01/07/97 2,500,000
Los Angeles County MF Hsg. RB(A-1+)
3,500,000 2.80 01/07/97 3,500,000
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty
Trust Co./Westdeutsche Landesbank Girozentrale/Bank
of America/Union Bank of Switzerland
LOC)(SP-1/VMIG1)
12,450,000 4.50 06/30/97 12,492,536
Newport Beach VRDN RB Series 1996 A(A-1+)
600,000 5.15 01/01/97 600,000
State of California RANS Series 1996-97(SP-1+/VMIG1)
45,800,000 4.05 01/07/97 45,800,000
- -----------------------------------------------------------
$92,192,536
- -----------------------------------------------------------
Colorado--0.6%
State of Colorado General Fund TRANS Series 1996
A(SP-1+)
$10,000,000 4.50% 06/27/97 $10,033,630
- -----------------------------------------------------------
Connecticut--1.4%
State of Connecticut Development Authority
PCRB(Deutsche Bank LOC)(A-1+/VMIG1)
$17,400,000 4.15%/(b)/ 01/07/97 $17,400,000
State of Connecticut State 2nd Lien VRDN (Commerzbank
Bank LOC)(A-1+/VMIG1)
4,800,000 4.00 01/07/97 4,800,000
- -----------------------------------------------------------
$22,200,000
- -----------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES for Georgetown
University Series 1988 B, C and E (Bayerishe
Landesbank Girozentrale LOC)
(A-1+/VMIG1)
$10,900,000 4.10% 01/07/97 $10,900,000
HFA MF Hsg. for Mclean Gardens South Apartments VRDN
(Sumitomo Bank LOC)(VMIG1)
7,000,000 4.30 01/07/97 7,000,000
- -----------------------------------------------------------
$17,900,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Florida--2.8%
Dade County Water & Sewer VRDN Series 1994(A-1+/VMIG1)
$7,475,000 4.00%/(b)/ 01/07/97 $ 7,475,000
Florida Local Government Pooled CP Notes (First Union
National Bank of Florida LOC)(A-1+/P-1)
29,162,000 3.70 01/24/97 29,162,000
7,225,800 3.60 02/18/97 7,225,800
1,800,000 3.50 03/14/97 1,800,000
- -----------------------------------------------------------
$45,662,800
- -----------------------------------------------------------
Georgia--12.0%
Albany Dougherty PCRB for Philip Morris Co. (A-1/P-1)
$17,000,000 4.15% 01/07/97 $17,000,000
Albany Dougherty PCRB Series 1991 for Georgia Power
Co.(A-1+)
2,120,000 4.15 01/07/97 2,120,000
Burke County Development Authority RB(A-1+/VMIG1)
6,000,000 4.65 01/01/97 6,000,000
29,055,000 5.00 01/01/97 29,055,000
3,000,000 4.15 01/07/97 3,000,000
Burke County PCRB for Georgia Power Co.(A-1+/VMIG1)/(c)/
2,900,000 5.00 01/07/97 2,900,000
29,850,000 4.00/(b)/ 01/07/97 29,850,000
3,425,000 4.15 01/07/97 3,425,000
6,000,000 4.15 01/07/97 6,000,000
Burke County PCRB for Georgia Power Co. Series
1994(VMIG1)
3,400,000 5.00 01/07/97 3,400,000
Cobb County Institute of Nuclear Operations Inc. VRDN
for Georgia Power Co. (Suntrust Bank LOC)(Aa3)
4,295,000 4.15 01/07/97 4,295,000
Cobb County Power Operations Inc. VRDN (Trust Company
Bank LOC)(AA-)
2,330,000 4.15 01/07/97 2,330,000
Columbus Hospital Authority RB for St. Francis
Hospital(VMIG1)
7,750,000 4.15/(b)/ 01/01/97 7,750,000
DeKalb County IDA VRDN for Siemens Energy and
Automation, Inc.(P-1)
3,750,000 4.05 01/07/97 3,750,000
Dekalb Private Hospital Authority VRDN for Egleston
Children's Hospital Series 1994 A (Suntrust Bank
LOC)(VMIG1)
1,800,000 4.05 01/07/97 1,800,000
Floyd County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
5,080,000 5.00 01/07/97 5,080,000
Fulco Hospital Authority Revenue Anticipation
Certificates Series 1992 (Suntrust Bank LOC)(A-1+)
4,815,000 4.15% 01/07/97 4,815,000
Georgia Municipal Gas Authority RB(A-1/VMIG1)
22,200,000 4.00/(b)/ 01/07/97 22,200,000
Heard County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
1,800,000 5.00 01/01/97 1,800,000
Henry County IDA PCRB for Georgia Pacific Corp.
(Suntrust Bank LOC)(Aa3)
4,000,000 4.15 01/07/97 4,000,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1985 B and C (Credit
Suisse/Morgan Guaranty/Bayerische Landesbank
Girozentrale LOC)(A-1+/P-1)
12,650,000 3.55 03/06/97 12,650,000
8,145,000 3.55 03/11/97 8,145,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1994 C (Credit
Suisse/Morgan Guaranty/
Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
7,000,000 3.50 03/13/97 7,000,000
Savannah Economic Development Authority PCRB VRDN for
Savannah Electric & Power Co. (A-1/VMIG1)
4,085,000 4.15 01/07/97 4,085,000
- -----------------------------------------------------------
$192,450,000
- -----------------------------------------------------------
Hawaii--0.1%
Hawaii Housing Finance and Development Authority VRDN
(FHLB LOC)(A-1+)
$ 2,200,000 2.80% 01/07/97 $ 2,200,000
- -----------------------------------------------------------
Idaho--0.6%
Idaho Health Facilities for Holy Cross Health
Systems(A-1/VMIG1)
$10,000,000 4.10% 01/07/97 $10,000,000
- -----------------------------------------------------------
Illinois--3.2%
Belleville IDA for Weyerhaeuser Company Series
1993(A-1)
$ 1,800,000 4.21% 01/07/97 $ 1,800,000
Illinois Health Facilities Authority VRDN for Central
Dupage Hospital (Rabobank Nederland LOC)(VMIG1)
5,000,000 5.25 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for
Resurrection Healthcare(VMIG1)
15,000,000 5.00 01/01/97 15,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
Illinois (continued)
Illinois Health Facilities Authority VRDN Series 1985 D Revolving
Fund Pooled Finance Program (First National Bank of Chicago
LOC)(A-1/VMIG1)
$16,600,000 4.15% 01/07/97 $ 16,600,000
Illinois Health Facility Authority VRDN for Elmhurst Memorial
Hospital(VMIG1)
100,000 5.30 01/01/97 100,000
Sauget PCRB VRDN Series 1992(P-1)
3,300,000 4.20 01/07/97 3,300,000
Sauget PCRB VRDN Series 1993(P-1)
9,335,000 4.20 01/07/97 9,335,000
- -----------------------------------------------------------
$ 51,135,000
- -----------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN Series 1985 C and D (Bank of
America LOC)(VMIG1)
$ 1,180,000 4.15% 01/07/97 $ 1,180,000
Fort Wayne Parkview Memorial Hospital VRDN Series 1985
B, C & D (Fuji Bank LOC)(VMIG1)/(c)/
16,855,000 4.15 01/07/97 16,855,000
Gary CP Notes for U.S. Steel Corp. (Bank of New York LOC)
(A-1+/P-1)
20,000,000 3.55 03/11/97 20,000,000
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/VMIG1)
29,490,000 4.20 01/07/97 29,490,000
Jasper County PCRB for Nipsco Series 1994 A(A-1+/VMIG1)
5,200,000 5.10 01/01/97 5,200,000
Schererville Economic Development VRDN Series 1983 for Avery
International Corp. Project (Bankers Trust LOC)(Aa2)
4,000,000 4.13 01/07/97 4,000,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
5,000,000 4.15 01/07/97 5,000,000
- -----------------------------------------------------------
$ 81,725,000
- -----------------------------------------------------------
Iowa--1.4%
Muscatine County VRDN for Monsanto Corp.(P-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Salix PCRB VRDN for Midwest Power Systems Inc.(A-1/VMIG1)/(c)/
21,795,000 4.15 01/07/97 21,795,000
- -----------------------------------------------------------
$ 22,795,000
- -----------------------------------------------------------
Kentucky--1.7%
Calvert VRDN for Air Products and Chemicals Inc. Project(A-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Mason County Variable/Fixed Rate PCRB Pooled for East Kentucky
Power (CFC)(A-1+/Aa3)
13,450,000 4.15 01/07/97 13,450,000
Trimble County PCRB for Louisville Gas & Electric Series 1996 A(A-
1+/VMIG1)
12,500,000 3.50 03/14/97 12,500,000
- -----------------------------------------------------------
$ 26,950,000
- -----------------------------------------------------------
Louisiana--2.5%
Ascension Parish PCRB for BASF Wyandotte Corp. Series
1985 (Bank of Tokyo LOC)(P-1)
$ 2,600,000 5.10% 01/01/97 $ 2,600,000
Ascension Parish PCRB for Vulcan Materials Co. Series 1996(A-
1+/VMIG1)
8,200,000 4.20 01/07/97 8,200,000
Louisiana Public Facilities Authority School Health Care System
UPDATE Series 1993(A-1+/VMIG1)
7,700,000 3.60 01/08/97 7,700,000
Parish of Desoto PCRB Series 1991 A (Swiss Bank LOC)(A-1+/VMIG1)
4,600,000 4.05 01/07/97 4,600,000
Parish of Iberville VRDN for Air Products and Chemicals, Inc.
Project(A-1)
6,200,000 4.20 01/07/97 6,200,000
Plaquemines Port RB for Teco Energy, Inc. Series 1985 B(A-1+/P-1)
2,000,000 3.60 02/13/97 2,000,000
South Louisiana Port Commission RB for Occidental Petroleum Corp.
Series 1996 (Wachovia Bank LOC)(P-1)
4,400,000 4.15 01/07/97 4,400,000
West Baton Rouge Parish VRDN for Dow Chemical Co. Series 1991
(P-1)
4,000,000 3.55 02/10/97 4,000,000
- -----------------------------------------------------------
$ 39,700,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Maryland--0.9%
Baltimore County Consolidated Public Improvement BANS Series
1995(A-1+/P-1)
$10,000,000 3.55% 02/06/97 $ 10,000,000
Frederick GO VRDN (Fuji Bank LOC)(A-1/VMIG1)
4,800,000 4.25 01/07/97 4,800,000
- --------------------------------------------------------------------
$ 14,800,000
- --------------------------------------------------------------------
Massachusetts--1.6%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$11,000,000 3.75% 02/28/97 $ 11,008,115
Massachusetts Health & Education Authority RB for Harvard
University Series I(A-1+/VMIG1)/(c)/
13,866,000 3.90 01/07/97 13,866,000
- --------------------------------------------------------------------
$ 24,874,115
- --------------------------------------------------------------------
Michigan--0.7%
Michigan Job Development Authority for Mazda Motor Manufacturing
VRDN (Sumitomo Bank LOC)(VMIG1)
$11,100,000 4.25% 01/07/97 $ 11,100,000
- --------------------------------------------------------------------
Minnesota--1.5%
Becker PCRB for Northern States Power Co. Series 1992 A(A-1+)
$ 8,000,000 3.65% 01/16/97 $ 8,000,000
6,000,000 3.55 03/12/97 6,000,000
Becker PCRB for Northern States Power Co. Series 1993 A(A-1/VMIG1)
4,000,000 3.55 03/12/97 4,000,000
White Bear Lake IDA for Weyerhauser Co. Series 1993(A-1)
6,800,000 4.21 01/07/97 6,800,000
- --------------------------------------------------------------------
$ 24,800,000
- --------------------------------------------------------------------
Mississippi--0.6%
Canton IDR for Levi Strauss Co. (Bank of America LOC)(P-1)
$10,000,000 4.15%/(b)/ 01/07/97 $ 10,000,000
- --------------------------------------------------------------------
Missouri--1.8%
Belton RB (Texas Commerce Bank LOC)(P-1)
$ 4,025,000 4.25% 01/07/97 $ 4,025,000
Kansas City Cloversett IDA MF Hsg. RB Series 1988 VRDN (Boatmen's
Bank of Kansas City LOC)(A-1+)
8,720,000 4.30 01/07/97 8,720,000
Missouri Health & Education Facility Authority VRDN (MBIA)(AAA)
10,500,000 4.10 01/07/97 10,500,000
State Environmental Improvement and Energy Resources
Authority RB for Monsanto Corporation (P-1)
$ 5,520,000 4.20% 01/07/97 $ 5,520,000
- --------------------------------------------------------------------
$ 28,765,000
- --------------------------------------------------------------------
Montana--0.3%
Forsyth PCRB for Pacificorp. Series 1988 (Industrial Bank of Japan
LOC)(A-1/P-1)
$ 3,400,000 4.70% 01/01/97 $ 3,400,000
Montana State Board of Investments VRDN Payroll Tax Bonds(VMIG1)
1,000,000 4.00 01/07/97 1,000,000
- --------------------------------------------------------------------
$ 4,400,000
- --------------------------------------------------------------------
Nevada--0.2%
Clark County VRDN for Nevada Airport System (MBIA)
(A-1+/VMIG1)
$ 3,200,000 4.00% 01/07/97 $ 3,200,000
- --------------------------------------------------------------------
New Jersey--3.3%
New Jersey TRANS Series 1997 A(A-1+/P-1)
$48,000,000 3.50% 03/12/97 $ 48,000,000
New Jersey Turnpike Authority RB Series 1991 D (FGIC)(P-1)
5,600,000 3.75 01/07/97 5,600,000
- --------------------------------------------------------------------
$ 53,600,000
- --------------------------------------------------------------------
New Mexico--0.2%
Farmington PCRB for Arizona Public Service Series 1994 A (Union
Bank of Switzerland LOC)(A-1+/P-1)
$ 2,600,000 5.00% 01/01/97 $ 2,600,000
- --------------------------------------------------------------------
New York--12.1%
New York City GO VRDN Series 1993 B (FGIC)(A-1+/VMIG1)
$ 5,500,000 4.50% 01/01/97 $ 5,500,000
New York City GO (MBIA)(VMIG1)
19,800,000 4.15 01/07/97 19,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
60,000,000 4.50 04/15/97 60,137,770
New York City GO Series 1992 D (FGIC)
20,000,000 3.95 01/07/97 20,000,000
New York City GO Series 1994 (Union Bank of Switzerland
LOC)(A-1+/VMIG1)
2,200,000 4.50 01/01/97 2,200,000
New York City GO VRDN (Dai-Ichi Kangyo Bank LOC)(A-1/VMIG1)
2,600,000 4.50 01/01/97 2,600,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
New York (continued)
New York City GO VRDN (Norinchukin Bank LOC) (A-1+/VMIG1)
$ 7,000,000 4.50% 01/01/97 $ 7,000,000
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
8,900,000 3.50 03/12/97 8,900,000
New York City Municipal Water Finance Authority Series 3 (Toronto
Dominion Bank/Bank of Nova Scotia
LOC)(A-1+/P-1)
3,000,000 3.50 03/11/97 3,000,000
New York State Energy Research & Development Authority PCRB for
New York State Electric & Gas Series 1994 D (Union Bank of
Switzerland LOC)(A-1+/VMIG1)
8,700,000 4.40 01/01/97 8,700,000
New York State Housing Finance Agency for Normandie Court
Housing RB Series 1987 A (Fleet Bank LOC)(VMIG1)
900,000 4.00 01/07/97 900,000
New York State Local Government Assistance Series 1995 B VRDN
(Bank of Nova Scotia LOC)(A-1+/VMIG1)/(c)/
19,600,000 4.00 01/07/97 19,600,000
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
1,150,000 3.85 01/07/97 1,150,000
New York State Local Government VRDN Series 1995 F (Toronto
Dominion Bank LOC)(A-1+/VMIG1)/(c)/
15,000,000 4.00 01/07/97 15,000,000
New York State Triborough Bridge & Tunnel Authority VRDN
(FGIC)(A-1+/VMIG1)
19,300,000 4.00 01/07/97 19,300,000
- --------------------------------------------------------------------
$193,787,770
- --------------------------------------------------------------------
North Carolina--6.0%
North Carolina Eastern Municipal Power Agency RB Series 1988 B
(Morgan Guaranty/Union Bank of Switzerland LOC)(A-1+)
$ 2,700,000 3.70% 01/16/97 $ 2,700,000
10,000,000 3.70 01/27/97 10,000,000
Person County PCRB for Carolina Power & Light Series 1992 A
(A-1/P-1)
7,000,000 4.25 01/07/97 7,000,000
Rockingham County IDA PCRB for Philip Morris Co.(A-1/P-1)
3,960,000 4.15 01/07/97 3,960,000
North Carolina (continued)
Wake County PCRB for Carolina Power & Light Series 1990 A & B (Fuji
Bank LOC)(A-2/P-1)
$ 7,000,000 3.75% 02/06/97 $ 7,000,000
11,000,000 3.55 02/07/97 11,000,000
12,100,000 3.55 02/10/97 12,100,000
12,900,000 3.75 02/14/97 12,900,000
29,000,000 3.75 02/18/97 29,000,000
- -------------------------------------------------------------
$95,660,000
- -------------------------------------------------------------
Ohio--2.4%
Cleveland-Cuyahoga County Port Authority VRDN for Rock & Roll
Hall of Fame (Credit Local de France LOC)(A-1+)
$ 9,000,000 4.05% 01/07/97 $ 9,000,000
Columbus Electric System Series 1994 RB (Union Bank of Switzerland
LOC)(VMIG1)
10,620,000 3.35 01/31/97 10,620,000
Franklin County Hospital RB for Holy Cross Health System Series
1995(A-1/VMIG1)/(c)/
18,900,000 4.10 01/07/97 18,900,000
- -------------------------------------------------------------
$38,520,000
- -------------------------------------------------------------
Oregon--1.7%
Lane County PCRB VRDN for Weyerhaeuser Company Series 1994
(A-1)
$ 6,500,000 4.21% 01/07/97 $ 6,500,000
Portland VRDN for Columbia Grain Inc. Project (Fuji Bank/Bank of
Tokyo LOC)(VMIG1)
17,650,000 4.25 01/07/97 17,650,000
State of Oregon Veteran's Welfare Series 73 H VRDN (Morgan
Guaranty LOC)(A-1+/VMIG1)
3,400,000 4.00 01/07/97 3,400,000
- -------------------------------------------------------------
$27,550,000
- -------------------------------------------------------------
Pennsylvania--2.7%
Allegheny County PCRB for U.S. Steel Series 1985 (Commerzbank
LOC)(A-1+/P-1)
$28,400,000 3.50% 03/13/97 $28,400,000
Allegheny County PCRB for U.S. Steel Series 1986 (Commerzbank
LOC)(A-1+/P-1)
700,000 3.50 02/06/97 700,000
Philadelphia TRANS Series 1996-97 A(SP-1/VMIG1)
14,000,000 4.50 06/30/97 14,036,476
- --------------------------------------------------------------
$43,136,476
- --------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Puerto Rico--2.0%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$32,000,000 4.00% 07/30/97 $ 32,103,040
- -------------------------------------------------------------------
South Carolina--0.7%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/VMIG1)
$11,275,000 4.15% 01/07/97 $ 11,275,000
- -------------------------------------------------------------------
Texas--11.5%
Brazos Harbor IDA VRDN for Monsanto Co.(P-1)
$ 3,500,000 4.20% 01/07/97 $ 3,500,000
Brazos River Authority PCRB Series 1994 for Monsanto Co.(P-1)
5,100,000 4.20 01/07/97 5,100,000
Brazos River Authority VRDN for Monsanto Co.(P-1)
5,300,000 4.20 01/07/97 5,300,000
Brazos River Harbor Authority VRDN for Dow Chemical Corp. Series
1991(A-1/P-1)
13,500,000 3.60 01/24/97 13,500,000
Harris County Health Facilities Development Corp. UPDATE Series
1993(A-1+/VMIG1)
5,200,000 3.55 01/07/97 5,200,000
5,200,000 3.50 01/29/97 5,200,000
Harris County Hospital RB for Childrens Hospital Series 1989 B-2
(VMIG1)
7,900,000 4.10 01/07/97 7,900,000
Harris County Toll Road VRDN Series 1994 C(A-1+/VMIG1)
23,700,000 4.05 01/07/97 23,700,000
Nueces River IDA PCRB UPDATE for San Miguel Electric Series 1984
(CFC)(A-1+/VMIG1)
25,000,000 3.50 02/26/97 25,000,000
25,700,000 3.50 03/10/97 25,700,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
18,800,000 3.50 03/12/97 18,800,000
State of Texas TRANS Series 1996(SP-1+/VMIG1)/(c)/
25,000,000 4.75/(b)/ 08/29/97 25,193,274
20,000,000 4.75 08/29/97 20,154,620
- -------------------------------------------------------------------
$ 184,247,894
- -------------------------------------------------------------------
Utah--0.2%
Salt Lake County PCRB for Service Station/British Petroleum Series
1994 B(P-1)
$ 2,815,000 5.00% 01/01/97 $ 2,815,000
- -------------------------------------------------------------------
Virginia--6.7%
Chesapeake PCRB for Virginia Electric & Power Series
1985(A-1/P-1)
$22,000,000 3.60% 02/06/97 $22,000,000
Chesterfield County PCRB for Philip Morris Series 1987 A(A-1/P-1)
5,000,000 3.55 02/06/97 5,000,000
Chesterfield County PCRB for Philip Morris Series 1992(A-1/P-1)
14,700,000 4.15 01/07/97 14,700,000
Chesterfield County PCRB for Virginia Electric & Power Series 1985
(A-1/P-1)
8,000,000 3.60 02/07/97 8,000,000
5,200,000 3.60 02/12/97 5,200,000
Chesterfield County PCRB for Virginia Electric & Power
Series 1987 C(A-1/P-1)
1,000,000 3.60 02/12/97 1,000,000
Louisa PCRB For Virginia Electric & Power Series 1984(A-1/P-1)
4,000,000 3.60 02/07/97 4,000,000
4,000,000 3.60 02/13/97 4,000,000
3,000,000 3.60 02/14/97 3,000,000
Louisa PCRB for Virginia Electric & Power Series 1987(A-1/P-1)
1,300,000 3.55 02/06/97 1,300,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
20,400,000 4.10 01/07/97 20,400,000
Spotsylvania IDA for Carlisle Corporation (Suntrust Bank LOC)(AA3)
6,500,000 4.15/(b)/ 01/07/97 6,500,000
York County PCRB for Virginia Electric & Power Series 1985(A-1/P-1)
9,400,000 3.70 01/14/97 9,400,000
2,700,000 3.65 03/10/97 2,700,000
- -------------------------------------------------------------------
$ 107,200,000
- -------------------------------------------------------------------
Washington--4.6%
King County Sewer Revenue BANS Series A(A-1/P-1)
$10,000,000 3.55% 03/10/97 $10,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1992(A-1+)
1,000,000 4.21 01/07/97 1,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1993(A-1+)
5,850,000 4.21 01/07/97 5,850,000
Port of Kalama Floating/Fixed Rate for Conagra, Inc. Series 1983
(Morgan Guaranty Trust LOC)(AAA)
2,230,000 4.00 01/07/97 2,230,000
Union Gap City IDA VRDN for Weyerhaeuser Project Series 1992(A-1)
1,600,000 4.21 01/07/97 1,600,000
- ------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Washington (continued)
Washington Health Care Facilities Authority VRDN Series 1996
(Morgan Guaranty Trust LOC)(VMIG1)
$4,300,000 5.25% 01/01/97 $ 4,300,000
Washington Public Power Supply Project Electric RB Series 1993-1A
(Bank of America LOC)(A-1+/VMIG1)
10,860,000 4.10 01/07/97 10,860,000
Washington Public Power Supply Project Electric RB Series 1993-2A
(Bank of America LOC)(A-1/VMIG1)
11,100,000 4.10 01/07/97 11,100,000
Washington Public Power Supply System RB Series 1993-3A
(Bank of America LOC)(A-1+/VMIG1)
15,000,000 4.10/(b)/ 01/07/97 15,000,000
3,115,000 3.95 01/07/97 3,115,000
8,200,000 4.10 01/07/97 8,200,000
- -----------------------------------------------------------
$73,255,000
- -----------------------------------------------------------
Wyoming--1.4%
Pacificorp PCRB VRDN for Sweetwater County Series 1990 A
(Credit Suisse LOC)(VMIG1)
$16,200,000 4.15% 01/07/97 $16,200,000
Sweetwater County PCRB for Idaho Power Co. Series 1996 C
(A-1+/VMIG1)
6,100,000 5.10 01/01/97 6,100,000
- -----------------------------------------------------------
$22,300,000
- -----------------------------------------------------------
Total Investments $1,749,033,261/(a)/
==========================================================
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
/(b)/When-issued securities.
/(c)/Portions of these securities are being segregated for when-issued
securities.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those type of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
California--96.4%
California Health Facilities Authority VRDN for Kaiser Permanente
Series 1993 A, B & C RB(A-1+/VMIG1)
$ 2,000,000 4.00% 01/07/97 $ 2,000,000
California Health Facility Finance Authority RB Series
1990 A VRDN (Rabobank Nederland LOC)(A-1+/VMIG1)
8,100,000 4.00 01/07/97 8,100,000
California PCRB for Pacific Gas & Electric (Banque Nationale de Paris
LOC)(A-1+)
4,100,000 4.80 01/01/97 4,100,000
California Pollution Control Financing Authority for Southern
California Edison Adjustable TRB Series 1986 D(A-1/VMIG1)
1,800,000 4.70 01/01/97 1,800,000
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
10,000,000 3.47 01/31/97 10,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
25,500,000 4.01 01/07/97 25,500,000
California School Cash Reserves Program Authority Series 1996 A
(MBIA)(SP-1/VMIG1)
9,000,000 4.75 07/02/97 9,040,248
California School Cash Reserves Program Authority Series 1996 B
(MBIA)(VMIG1)
10,000,000 4.50 12/19/97 10,083,758
California Statewide Communities Development Authority
for Kaiser Foundation Hospital 1995 COPS(A-1+/VMIG1)
16,500,000 4.00 01/07/97 16,500,000
California Statewide Communities Development Authority RB Series
1995 A (A-1+)
13,900,000 3.90 01/07/97 13,900,000
California Statewide Communities Development Authority Series
1995A-1(A-1+)
14,200,000 3.90 01/07/97 14,200,000
California Statewide Communities Development Authority, Refunding
RB Series 1995A-2(A-1+)
5,500,000 3.90 01/07/97 5,500,000
Chula Vista RB Series 1996 A for San Diego Gas & Electric(A-
1/VMIG1)
11,200,000 5.10 01/01/97 11,200,000
City of Anaheim Electric RANS Tax Exempt CP
Notes(A-1+/P-1)
8,950,000 3.45 01/29/97 8,950,000
City of Fresno MF Hsg. Revenue Refunding Bonds Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
3,315,000 4.15 01/07/97 3,315,000
City of Irwindale IDRB Series 1984 for Toys-R-Us VRDN (Bankers
Trust LOC)(AA2)
2,000,000 4.13% 01/07/97 2,000,000
City of Los Angeles VRDN MF Hsg. Museum Terrace-84H (Bank of
America LOC)(VMIG1)
3,500,000 4.00 01/07/97 3,500,000
City of Newport Beach Floating/Fixed Rate Health Facilities Memorial
Hospital Facility VRDN(A-1/VMIG1)
10,750,000 5.15 01/01/97 10,750,000
City of Newport Beach VRDN RB Series 1996 A(A-1+)
3,800,000 5.15 01/01/97 3,800,000
City of Newport Beach VRDN RB Series 1996 B(A-1+)
23,000,000 5.15 01/01/97 23,000,000
City of San Diego VRDN MF Hsg. RB Series 1985 (Bank of
America LOC)(VMIG1)
15,700,000 4.05 01/07/97 15,700,000
City of San Diego MF Hsg. for Lacima Apartments VRDN (Citibank
LOC)(VMIG1)
13,125,000 4.05 01/07/97 13,125,000
City of San Diego MF Hsg. for Nobel Court Apartments VRDN
(Citibank LOC)(VMIG1)
11,555,000 4.05 01/07/97 11,555,000
Contra Costa MF Hsg. for Lakeshore Apartments VRDN(A-1+)
4,600,000 4.05 01/07/97 4,600,000
East Bay Municipal Utility District California Water & Waste
(A-1+/P-1)
4,300,000 3.45 02/27/97 4,300,000
Huntington Beach City Monthly MF Hsg. VRDN Series 1985 A (Bank
of America LOC)(VMIG1)
7,500,000 4.00 01/31/97 7,500,000
Kings County Housing Authority MF Hsg. Refunding RB Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
2,500,000 4.15 01/07/97 2,500,000
Los Angeles County Metro Transportation Authority VRDN
(MBIA)(SP-1+/VMIG1)
4,595,000 4.00 01/07/97 4,595,000
Los Angeles County Metro Transportation Authority RANS Series 1996
A(VMIG1)
10,000,000 4.00 02/27/97 10,013,586
Los Angeles County Metro Transportation CP Notes (National
Westminster/Union Bank of California/ABN Amro/Canadian
Imperial Bank of Commerce/Banque Nationale de Paris LOC)
(A-1+/P-1)
10,000,000 3.65 01/10/97 10,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
California (continued)
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty Trust
Co./Westdeutsche Landesbank Girozentrale/Bank of
America/Union Bank of Switzerland LOC)(SP-1+/VMIG1)
$16,400,000 4.50% 06/30/97 $16,456,497
Los Angeles County, VRDN MF Hsg. for Valencia Village Series 1984 C
(Industrial Bank of Japan Ltd. LOC)(A-1+)
16,400,000 2.80 01/07/97 16,400,000
Los Angeles Housing Authority MF Hsg. VRDN for Canyon Country
Villas Series 1985 H (Industrial Bank of Japan Ltd. LOC)(VMIG1)
19,000,000 2.80 01/07/97 19,000,000
Northern California Power Agency Geothermal Project Number 3
Adjustable Rate RB Series 1996 A (AMBAC)(A-1+/VMIG1)
8,500,000 3.85 01/07/97 8,500,000
Orange County Apartment Development RB Issue 1984 C Seaside
Meadow (Fuji Bank Ltd.)(A-1/VMIG1)
24,000,000 3.95 01/07/97 24,000,000
Pomona Public Financing Authority VRDN (Sumitomo Bank LOC)
(SP-1+)
2,075,000 4.25 01/07/97 2,075,000
Sacramento County 1990 COP Admin-Center Courthouse Project
VRDN (Union Bank of Switzerland LOC)(A-1+/VMIG1)
500,000 3.75 01/07/97 500,000
San Bernardino County VRDN-Woodview Apartments Series
1985 (Bank of America LOC)(VMIG1)
6,500,000 4.05 01/07/97 6,500,000
San Diego County MF Hsg. for Country Hills VRDN (FNMA)
(A-1+)
10,300,000 4.05 01/07/97 10,300,000
San Diego IDB Series 1995 B for San Diego Gas & Electric(A-1/VMIG1)
1,000,000 3.50 01/23/97 1,000,000
San Leandro MF Hsg. VRDN Series 1985 B- Haas Avenue
Apartments (Bank of America LOC)(VMIG1)
3,900,000 4.00 01/07/97 3,900,000
Southern California Metro Water District Series A CP Notes(A-1+/P-1)
5,400,000 3.50 02/20/97 5,400,000
Southern California Metropolitan Water District Revenue
Refunding Bonds Series 1996 A (AMBAC)(A-1+/VMIG1)
4,500,000 4.00 01/07/97 4,500,000
Southern California Public Power Authority 1991 Subordinated
Revenue Refunding Bonds (AMBAC)(A-1+/VMIG1)
9,100,000 3.90 01/07/97 9,100,000
Southern California Public Power Authority Power
Project RB Series 1996 B (AMBAC)(A-1+/VMIG1)
7,500,000 3.90 01/07/97 7,500,000
Southern California Public Power Authority Power
Project RB Series 1996 C (AMBAC)(A-1+/VMIG1)
10,000,000 3.90 01/07/97 10,000,000
Triunfo Sanitation District VRDN Refunding RB Series 1994 (Banque
Nationale de Paris LOC)(A-1+)
3,700,000 4.20 01/07/97 3,700,000
Tulare-Porterville Schools Finance Authority COPS (Union Bank of
California LOC)(VMIG1)
4,935,000 4.30 01/07/97 4,935,000
- -----------------------------------------------------------
$424,894,089
- -----------------------------------------------------------
Puerto Rico--3.2%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$14,000,000 4.00% 07/30/97 $14,045,081
- -----------------------------------------------------------
Total Investments $438,939,170/(a)/
===========================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York--94.2%
City of Yonkers IDA RB for Consumers (Industrial Bank
of Japan LOC)(VMIG1)
$2,700,000 3.90% 01/07/97 $2,700,000
City of Yonkers IDA Series 1991 Civic Facility RB
(Industrial Bank of Japan LOC)(VMIG1)
2,900,000 3.90 01/07/97 2,900,000
Great Neck North Water Authority Water System RB Series
1993 A VRDN (FGIC)(A-1+/VMIG1)
3,800,000 4.00 01/07/97 3,800,000
IDA Civic Facility RB Cold Spring Harbor Labs Series
1989 VRDN (Morgan Guaranty Trust LOC)(A-1+)
2,200,000 4.90 01/01/97 2,200,000
Metropolitan Museum of Art Variable Rate Interest
Bonds(AA/AA)
1,500,000 4.00 01/07/97 1,500,000
Metropolitan Transportation Authority Commuter Facility
VRDN Series 1991 (National Westminster/Morgan
Guaranty/Industrial Bank of Japan/Sumitomo Bank/J.P.
Morgan/Bank of Tokyo LOC)(A-1+/VMIG1)
3,400,000 4.05 01/07/97 3,400,000
Nassau County TANS Series 1996 B(SP-1+)
3,500,000 4.25 08/29/97 3,515,754
New York City GO Bonds (Sumitomo Bank LOC)(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
New York City GO Fiscal 1995 Series B-6
(MBIA)(A-1+/VMIG1)
3,900,000 5.10 01/01/97 3,900,000
1,250,000 5.10 01/01/97 1,250,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
4,000,000 4.50 04/15/97 4,009,256
New York City IDA - Civic Facility RB 1989 National
Audubon Society, Inc. (Swiss Bank Corp. LOC)(A-1+)
4,000,000 4.80 01/01/97 4,000,000
New York City IDA for Columbia Grammar Prep School VRDN
(Chemical Bank LOC)(A-1+)
2,500,000 4.15 01/07/97 2,500,000
New York City Municipal Water Finance Authority CP
Series 1 (Canadian Imperial Bank of Commerce
LOC)(P-1)
6,900,000 3.55 01/16/97 6,900,000
New York City Municipal Water Finance Authority Series
3 (Toronto Dominion Bank/Bank of Nova Scotia
LOC)(P-1)
2,500,000 3.50 03/11/97 2,500,000
New York City Trust for Cultural Resources American
Museum of Natural History Adjustable Rate TRB VRDN
(MBIA)(VMIG1)
$3,200,000 3.80% 01/07/97 $3,200,000
New York State Dormitory Authority RB Series 1990 B for
Cornell University VRDN(VMIG1)
4,700,000 4.80 01/01/97 4,700,000
New York State Energy Research & Development Authority
For Long Island Lighting Co. VRDN (Toronto Dominion
Bank LOC) (A-1+/P-1)
3,000,000 4.05 01/07/97 3,000,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 B
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
7,800,000 5.00 01/01/97 7,800,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 D
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
3,600,000 4.40 01/01/97 3,600,000
New York State Energy Research & Development Authority
PCRB for Rochester Gas & Electric Series 1984
(Credit Suisse LOC)(P-1)
2,100,000 3.40 01/31/97 2,100,000
New York State Energy Research & Development Authority
PCRB Series A & B - Central Hudson Gas & Electric
VRDN (Deutsche Bank LOC)(AA2)
1,300,000 3.90 01/07/97 1,300,000
New York State Energy Research & Development Authority
for Orange and Rockland Utilities Series 1995 A VRDN
(AMBAC)(A-1+/VMIG1)
5,000,000 3.80 01/07/97 5,000,000
New York State GO BANS Series R(A-1/P-1)
4,500,000 3.55 02/25/97 4,500,000
New York State GO BANS Series T(A-1/P-1)
3,500,000 3.55 02/24/97 3,500,000
New York State Housing Finance Agency for Normandie
Court Housing RB Series 1987 A (Fleet Bank
LOC)(VMIG1)
5,100,000 4.00 01/07/97 5,100,000
New York State Local Government Assistance Series 1995
B VRDN (Bank of Nova Scotia LOC)(A-1+/VMIG1)
1,700,000 4.00 01/07/97 1,700,000
New York State Local Government Series C VRDN
(Landesbank Hessen-Thueringen Girozentrale
LOC)(A-1+/VMIG1)
7,000,000 4.00 01/07/97 7,000,000
- ----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York (continued)
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
$700,000 3.85% 01/07/97 $ 700,000
New York State Medical Care Facility Financing Agency
for Children's Hospital of Buffalo RB Series 1991 A
(Barclays Bank LOC)(VMIG1)
1,900,000 4.20 01/07/97 1,900,000
New York State Triborough Bridge & Tunnel Authority
VRDN (FGIC)(A-1+/VMIG1)
4,700,000 4.00 01/07/97 4,700,000
Oswego County IDA PCRB Series 1992 for Philip
Morris(A-1/P-1)
1,000,000 4.15 01/07/97 1,000,000
Syracuse University IDA VRDN (Morgan Guaranty
LOC)(AA+/A-1 /VMIG1)
1,200,000 4.80 01/01/97 1,200,000
- -----------------------------------------------------------
$107,875,010
- -----------------------------------------------------------
Puerto Rico--5.7%
Commonwealth of Puerto Rico RANS Series 1997
A(SP-1+/VMIG1)
$3,500,000 4.00% 07/30/97 $ 3,511,271
Puerto Rico Government Development Bank VRDN (Credit
Suisse LOC)(A-1/VMIG1)
1,000,000 3.75 01/07/97 1,000,000
Puerto Rico Medical and Environmental PCRB Series 1983
A for Key Pharmaceuticals Inc. (Morgan Guaranty LOC)
2,000,000 3.75 12/01/97 2,000,000
- -----------------------------------------------------------
$ 6,511,271
- -----------------------------------------------------------
Total Investments $114,386,281/(a)/
===========================================================
/(a)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
BANS --Bond Anticipation Notes
CFC --Unconditionally Guaranteed by
Cooperative Finance Corp.
COPS --Certificates of Particication
CP --Commercial Paper
FGIC --Insured by Financial Guaranty
Insurance Co.
FNMA --Federal National Mortgage
Association
GO --General Obligation
HFA --Health Facility Authority
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDR --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TANS --Tax Anticipation Notes
TECP --Tax Exempt Commercial Paper
TRANS --Tax Revenue Anticipation Notes
TRB --Tender Revenue Bond
UPDATE --Unit Priced Daily Adjustable
Tax-Exempt Security
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- --------------------------------------
[This page intentionally left blank]
- -------------------------------------- -------------------------------------
23
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
==============================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value based on amortized cost $1,266,243,902 $ 990,797,391 $ 827,240,879
Interest receivable 3,701,956 3,538,130 1,378,983
Cash 143,480 128,908 152,717
Other assets 18,680 33,706 48,509
- ------------------------------------------------------------------------------------------------------------------------
Total assets 1,270,108,018 994,498,135 828,821,088
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investment securities purchased -- -- --
Dividends payable 5,999,306 4,784,617 3,427,645
Accrued expenses and other liabilities 530,616 513,611 459,492
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,529,922 5,298,228 3,887,137
- ------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 1,263,578,517 989,199,498 824,862,428
Accumulated undistributed net investment income -- -- --
Accumulated undistributed net realized gain (loss) on investment
transactions (421) 409 71,523
- ------------------------------------------------------------------------------------------------------------------------
Net assets $1,263,578,096 $ 989,199,907 824,933,951
========================================================================================================================
Net asset value, offering and redemption price per unit
(net assets/units outstanding) $ 1.00 $ 1.00 $ 1.00
========================================================================================================================
Units Outstanding:
ILA units 1,154,745,689 703,096,586 694,604,345
ILA Administration units 23,775,858 257,258,398 36,044,854
ILA Service units 84,710,642 28,844,514 94,213,229
ILA B units 346,328 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total units of beneficial interest outstanding, $.001 par value
(unlimited number of units authorized) 1,263,578,517 989,199,498 824,862,428
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
================================================================================================
<S> <C> <C> <C> <C> <C>
$ 810,267,968 $1,221,566,240 $3,300,609,972 $1,749,033,261 $438,939,170 $114,386,281
532,015 14,004,604 4,477,173 7,404,080 2,433,885 404,538
99,319 148,266 365,400 1,862,438 599,385 41,299
775 10,026 125,725 8,601 8,650 --
- ------------------------------------------------------------------------------------------------
810,900,077 1,235,729,136 3,305,578,270 1,758,308,380 441,981,090 114,832,118
- ------------------------------------------------------------------------------------------------
-- -- -- 150,828,428 -- --
3,404,801 4,597,910 13,642,248 4,524,992 1,168,073 274,842
428,726 525,543 1,305,746 494,147 194,663 62,795
- ------------------------------------------------------------------------------------------------
3,833,527 5,123,453 14,947,994 155,847,567 1,362,736 337,637
- ------------------------------------------------------------------------------------------------
$ 807,035,766 1,230,590,333 3,290,699,109 1,602,342,561 440,637,879 114,499,366
-- -- -- 362,642 10,495 1,634
30,784 15,350 (68,833) (244,390) (30,020) (6,519)
- ------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $440,618,354 $114,494,481
================================================================================================
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================================
574,608,995 708,990,271 2,303,703,731 1,514,523,522 440,495,857 70,178,026
108,916,431 137,701,171 794,578,398 59,097,259 142,022 44,321,340
123,510,340 383,898,891 192,416,980 28,918,372 -- --
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
807,035,766 1,230,590,333 3,290,699,109 1,602,539,153 440,637,879 114,499,366
================================================================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
=========================================
<S> <C> <C> <C>
Investment income:
Interest income $81,770,923 $54,320,799 $39,035,321
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 5,185,990 3,447,586 2,509,206
Transfer agent fees 592,685 394,010 286,766
Custodian fees 289,863 203,454 157,058
Professional fees 43,453 28,965 22,465
Trustees' fees 19,256 10,622 9,356
Other 178,787 197,862 186,415
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 6,310,034 4,282,499 3,171,266
Less--Expenses reimbursable and fees waived by Goldman Sachs (234,432) (736,102) (231,536)
- ----------------------------------------------------------------------------------------------------------------------
Net expenses 6,075,602 3,546,397 2,939,730
Administration unit fees 65,534 316,155 63,048
Service unit fees 494,274 128,313 352,931
- ----------------------------------------------------------------------------------------------------------------------
Net expenses and unit fees 6,635,410 3,990,865 3,355,709
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 75,135,513 50,329,934 35,679,612
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $75,207,918 $50,402,799 $35,742,274
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================
<S> <C> <C> <C> <C> <C>
$48,666,691 $53,608,537 $146,327,912 $54,107,112 $13,695,668 $3,421,539
----------------------------------------------------------------------------------------
3,157,511 3,629,131 9,496,253 5,391,039 1,410,751 359,201
360,858 414,758 1,085,286 616,119 161,229 41,051
197,650 167,744 459,900 135,944 45,236 21,336
27,555 34,247 77,027 42,553 13,995 6,322
11,552 12,842 34,394 17,650 4,574 1,215
157,226 213,340 423,802 136,197 38,866 7,681
- -----------------------------------------------------------------------------------------
3,912,352 4,472,062 11,576,662 6,339,502 1,674,651 436,806
(212,886) (2,294,583) (4,522,286) (1,564,664) (22,092) (108,395)
----------------------------------------------------------------------------------------
3,699,466 2,177,479 7,054,376 4,774,838 1,652,559 328,411
145,201 145,441 906,321 73,660 262 39,843
579,790 1,266,586 562,023 130,158 -- --
- -----------------------------------------------------------------------------------------
4,424,457 3,589,506 8,522,720 4,978,656 1,652,821 368,254
- -----------------------------------------------------------------------------------------
44,242,234 50,019,031 137,805,192 49,128,456 12,042,847 3,053,285
- -----------------------------------------------------------------------------------------
195,578 416,602 (4,477) (12,968) 15 (4,539)
- -----------------------------------------------------------------------------------------
$44,437,812 $50,435,633 $137,800,715 $49,115,488 $12,042,862 $3,048,746
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 75,135,513 $ 50,329,934 $ 35,679,612
Net realized gain(loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 75,207,918 50,402,799 35,742,274
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (67,076,054) (38,261,044) (29,556,990)
ILA Administration units (2,206,827) (10,545,315) (2,048,010)
ILA Service units (5,850,540) (1,523,575) (4,074,612)
ILA B units (2,092) -- --
Net realized gain on investment transactions
ILA units (65,059) (54,983) (38,029)
ILA Administration units (2,127) (15,267) (2,635)
ILA Service units (5,640) (2,206) (5,242)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (75,208,339) (50,402,390) (35,725,518)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 9,633,671,566 8,281,604,075 5,115,245,365
Reinvestment of dividends and distributions 40,414,429 38,191,105 17,312,306
Cost of units repurchased (9,962,009,233) (8,092,253,028) (5,011,078,568)
- ----------------------------------------------------------------------------------------------------------------------
Increase(decrease) in net assets resulting from unit transactions (287,923,238) 227,542,152 121,479,103
- ----------------------------------------------------------------------------------------------------------------------
Total increase(decrease) (287,923,659) 227,542,561 121,495,859
Net Assets:
Beginning of year 1,551,501,755 761,657,346 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,263,578,096 $ 989,199,907 $ 824,933,951
======================================================================================================================
Accumulated undistributed net investment income -- -- --
======================================================================================================================
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 8,756,241,159 5,161,953,773 4,490,979,392
Reinvestment of dividends and distributions 36,833,028 30,348,683 13,978,786
Units repurchased (8,899,537,496) (5,063,361,34) (4,380,790,567)
- ----------------------------------------------------------------------------------------------------------------------
(106,463,309) 128,941,113 124,167,611
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 318,656,203 2,902,067,359 220,574,807
Reinvestment of dividends and distributions 1,520,549 7,510,848 283,223
Units repurchased (359,456,201) (2,816,742,074) (232,371,387)
- ----------------------------------------------------------------------------------------------------------------------
(39,279,449) 92,836,133 (11,513,357)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 558,266,701 217,582,943 403,691,166
Reinvestment of dividends and distributions 2,060,072 331,574 3,050,297
Units repurchased (702,853,581) (212,149,611) (397,916,614)
- ----------------------------------------------------------------------------------------------------------------------
(142,526,808) 5,764,906 8,824,849
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (288,269,566)* 227,542,152 121,479,103
======================================================================================================================
</TABLE>
* In addition, ILA B units had sales, reinvestments of dividends and
distributions and repurchases of 507,503, 780 and 161,955 units,
respectively, for a net increase of 346,328 units.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 44,242,234 $ 50,019,031 $ 137,805,192 $ 49,128,456 $ 12,042,847 $ 3,053,285
195,578 416,602 (4,477) (12,968) 15 (4,539)
- ------------------------------------------------------------------------------------------------------
44,437,812 50,435,633 137,800,715 49,115,488 12,042,862 3,048,746
- ------------------------------------------------------------------------------------------------------
(32,818,890) (30,911,761) (101,011,206) (46,819,418) (12,036,826) (2,289,010)
(4,742,767) (4,651,770) (30,041,532) (1,375,597) (6,021) (764,275)
(6,680,577) (14,455,500) (6,752,454) (933,441) -- --
-- -- -- -- -- --
(124,367) (251,459) -- -- -- --
(17,973) (37,841) -- -- -- --
(25,316) (117,591) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(44,409,890) (50,425,922) (137,805,192) (49,128,456) (12,042,847) (3,053,285)
- ------------------------------------------------------------------------------------------------------
5,362,879,167 5,282,794,697 15,965,974,823 9,518,523,372 2,958,021,573 648,758,829
13,347,956 20,444,542 79,358,869 35,078,864 11,445,149 2,949,980
(5,492,732,128) (4,850,904,367) (15,106,127,095) (9,392,133,030) (2,875,637,134) (654,470,394)
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
- ------------------------------------------------------------------------------------------------------
(116,477,083) 452,344,583 939,202,120 161,456,238 93,829,603 (2,766,124)
923,543,633 778,261,100 2,351,428,156 1,441,004,575 346,788,751 117,260,605
- ------------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $ 440,618,354 $114,494,481
=======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
=======================================================================================================
3,696,243,017 3,783,423,031 11,171,686,790 9,264,641,627 2,957,305,487 340,781,821
11,811,603 19,300,481 66,486,820 34,471,658 11,444,982 2,236,468
(3,844,547,762) (3,680,022,103) (10,666,427,699) (9,127,243,309) (2,875,001,835) (363,376,230)
- ------------------------------------------------------------------------------------------------------
(136,493,142) 122,701,409 571,745,911 171,869,976 93,748,634 (20,357,941)
- ------------------------------------------------------------------------------------------------------
659,581,577 470,006,128 3,606,492,816 142,908,870 716,086 307,977,008
855,243 1,082,829 11,506,068 298,114 167 713,512
(644,240,509) (402,096,387) (3,340,378,274) (132,882,806) (635,299) (291,094,164)
- ------------------------------------------------------------------------------------------------------
16,196,311 68,992,570 277,620,610 10,324,178 80,954 17,596,356
- ------------------------------------------------------------------------------------------------------
1,007,054,573 1,029,365,538 1,187,795,217 110,972,875 -- --
681,110 61,232 1,365,981 309,092 -- --
(1,003,943,857) (768,785,877) (1,099,321,122) (132,006,915) -- --
- ------------------------------------------------------------------------------------------------------
3,791,826 260,640,893 89,840,076 (20,724,948) -- --
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
----------------------------------------------
<S> <C> <C> <C>
From Operations:
Net investment income $ 107,583,870 $ 49,478,386 $ 51,830,087
Net realized gain (loss) on investment transactions 14,828 23,170 168,758
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 107,598,698 49,501,556 51,998,845
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (90,145,210) (39,853,826) (42,814,965)
ILA Administration units (5,198,674) (8,266,526) (3,434,653)
ILA Service units (12,239,986) (1,358,034) (5,580,469)
Net realized gain on investment transactions
ILA units (12,607) (18,166) (138,212)
ILA Administration units (741) (4,378) (12,197)
ILA Service units (1,480) (626) (17,502)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (107,598,698) (49,501,556 ) (51,997,998)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 12,338,624,975 6,865,371,082 6,147,457,376
Reinvestment of dividends and distributions 46,658,797 34,033,174 18,869,484
Cost of units repurchased (13,117,315,317) 6,864,945,994) (6,596,822,965)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets resulting from unit
transactions (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (732,031,545) 34,458,262 (430,495,258)
Net Assets:
Beginning of year 2,283,533,300 727,199,084 1,133,933,350
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,551,501,755 $ 761,657,346 $ 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 10,673,706,881 5,167,984,860 5,286,093,615
Reinvestment of dividends and distributions 43,663,215 30,173,260 14,307,877
Units repurchased (11,419,966,319) (5,183,472,607) (5,611,448,715)
- ----------------------------------------------------------------------------------------------------------------------
(702,596,223) 14,685,513 (311,047,223)
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 801,545,537 1,503,847,493 385,128,154
Reinvestment of dividends and distributions 1,574,573 3,545,805 410,476
Units repurchased (889,335,631) (1,488,837,741) (433,455,523)
- ----------------------------------------------------------------------------------------------------------------------
(86,215,521) 18,555,557 (47,916,893)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 863,372,557 193,538,729 476,235,607
Reinvestment of dividends and distributions 1,421,009 314,109 4,151,131
Units repurchased (808,013,367) (192,635,646) (551,918,727)
- ----------------------------------------------------------------------------------------------------------------------
56,780,199 1,217,192 (71,531,989)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
======================================================================================================
<S> <C> <C> <C> <C> <C>
$ 49,882,996 $ 39,027,924 $ 127,991,600 $ 55,137,781 $ 10,292,899 $ 3,354,557
634,764 426,028 (11,971) (38,116) (4,501) --
- ------------------------------------------------------------------------------------------------------
50,517,760 39,453,952 127,979,629 55,099,665 10,288,398 3,354,557
- ------------------------------------------------------------------------------------------------------
(37,834,730) (31,147,754) (98,487,540) (50,915,901) (10,279,510) (2,746,431)
(5,921,841) (3,930,340) (26,181,728) (2,430,414) (13,389) (608,126)
(6,116,634) (3,949,830) (3,322,332) (1,791,466) -- --
(474,791) (338,176) -- -- -- --
(76,052) (43,832) -- -- -- --
(81,059) (43,878) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(50,505,107) (39,453,810) (127,991,600) (55,137,781) (10,292,899) (3,354,557)
- ------------------------------------------------------------------------------------------------------
5,295,765,985 4,545,981,787 12,879,366,733 9,669,281,502 2,111,844,558 637,393,901
14,985,214 18,329,605 59,359,416 35,116,542 9,384,940 3,009,869
(5,307,633,793) (4,472,240,590) (12,558,288,438) (9,832,589,904) (2,002,625,120) (646,630,502)
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ------------------------------------------------------------------------------------------------------
3,130,059 92,070,944 380,425,740 (128,229,976) 118,599,877 (6,226,732)
920,413,574 686,190,156 1,971,002,416 1,569,234,551 228,188,874 123,487,337
- ------------------------------------------------------------------------------------------------------
$ 923,543,633 $ 778,261,100 $2,351,428,156 $1,441,004,575 $ 346,788,751 $117,260,605
======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
======================================================================================================
4,098,618,029 3,716,958,431 9,845,256,084 9,311,743,687 2,111,311,145 412,445,304
12,443,257 17,215,281 53,443,869 34,419,501 9,375,255 2,397,973
(4,113,675,854) (3,695,227,116) (9,792,323,613) (9,438,508,967) (2,001,353,653) (408,825,174)
- ------------------------------------------------------------------------------------------------------
(2,614,568) 38,946,596 106,376,340 (92,345,779) 119,332,747 6,018,103
- ------------------------------------------------------------------------------------------------------
852,080,094 450,755,034 2,431,546,258 230,975,117 533,413 224,948,597
2,541,957 1,065,347 5,373,341 522,467 9,685 611,896
(859,607,724) (447,499,474) (2,249,895,904) (280,499,429) (1,271,467) (237,805,328)
- ------------------------------------------------------------------------------------------------------
(4,985,673) 4,320,907 187,023,695 (49,001,845) (728,369) (12,244,835)
- ------------------------------------------------------------------------------------------------------
345,067,862 378,268,322 602,564,391 126,562,698 -- --
-- 48,977 542,206 174,574 -- --
(334,350,215) (329,514,000) (516,068,921) (113,581,508) -- --
- ------------------------------------------------------------------------------------------------------
10,717,647 48,803,299 87,037,676 13,155,764 -- --
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Goldman Sachs--Institutional Liquid Assets Portfolios ("ILA"). The Trust is
registered under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. ILA consists of nine portfolios: Prime
Obligations, Money Market, Government, Treasury Obligations, Treasury
Instruments, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York. All of the portfolios are diversified except for the Tax-Exempt
California and Tax-Exempt New York Portfolios. ILA offers three classes of units
for each of its portfolios: ILA units, ILA Administration units and ILA Service
units. In addition, Prime Obligations offers ILA B units. The investment
objective of the Funds is to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ILA. The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
ILA uses the amortized-cost method for valuing portfolio securities, which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
---------------
It is each portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all investment company taxable and tax-exempt income to
its unitholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to unitholders for financial reporting
purposes is determined in accordance with federal income tax rules. Therefore,
the source of the Portfolios' distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1996, ILA's tax year end, the following portfolios had capital
loss carryforwards for U.S. Federal tax purposes of approximately:
<TABLE>
<CAPTION>
Years of
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Federal $ 72,000 2000 to 2004
Tax-Exempt Diversified 244,000 1997 to 2004
Tax-Exempt California 30,000 1999 to 2003
Tax-Exempt New York 7,000 1999 to 2004
</TABLE>
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
D. Expenses--
- --------------
Expenses incurred by ILA which do not specifically relate to an individual
portfolio of ILA are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Unitholders of ILA Administration, ILA Service and ILA B units bear all
expenses and fees paid to service and distribution organizations for their
services with respect to such units as well as other expenses (subject to
expense limitations) which are directly attributable to such units.
- --------------------------------------------------------------------------------
32
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31,1996
- --------------------------------------------------------------------------------
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser pursuant to
an Advisory Agreement. Under the Advisory Agreement, GSAM, subject to general
supervision of the Trust's Board of Trustees, manages the portfolios and
provides for the administration of ILA's other affairs. As compensation for the
services rendered under the Advisory Agreement and the assumption of the
expenses related thereto, GSAM is entitled to a fee, computed daily and payable
monthly, at an annual rate equal to .35% of each portfolio's average daily net
assets. For the year ended December 31, 1996 and until further notice, GSAM has
agreed to waive advisory fees of .05%, .20%, .15%, .10% and .09% for the Money
Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios, respectively.
Goldman Sachs also serves as ILA's transfer agent under a Transfer Agency
Agreement for a fee. In addition, Goldman Sachs acts as ILA's distributor under
a Distribution Agreement for which it receives no compensation. Amounts due to
Goldman Sachs are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
GSAM has voluntarily agreed that if the sum of a portfolio's expenses
(including the advisory fee, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses, administration, authorized
dealer service, distribution and service plan fees and other extraordinary
expenses) exceeds on an annualized basis .41% of such portfolio's net assets,
the portfolio will be reimbursed in the amount of such excess monthly.
In addition, GSAM has voluntarily agreed to reimburse the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios to the extent that each portfolio's expenses, as defined above,
exceed .36%, .21%, .26%, .31% and .32%, respectively, of the average net assets
per annum. Amounts due from Goldman Sachs at December 31, 1996 are included in
"Other assets" in the accompanying Statements of Assets and Liabilities.
The ILA B units of Prime Obligations Portfolio have adopted a Distribution
Plan (the "Distribution Plan") pursuant to Rule 12b-1. Under the Distribution
Plan, Goldman Sachs is entitled to a quarterly fee for distribution services
equal, on an annual basis, up to .75% of ILA B units average daily net assets.
The ILA B units of Prime Obligations Portfolio have adopted an Authorized
Dealer Service Plan (the "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for providing personal and account
maintenance services. ILA B units pay a fee under this Service Plan equal, on an
annual basis, up to .25% of ILA Class B's average daily net assets.
The chart below outlines the fee waivers and expense reimbursements for the
year ended December 31, 1996 and amounts owed to and due from Goldman Sachs at
December 31, 1996 (in thousands):
- -------------------------------------------------------------------------------
Due to
Goldman
Sachs Amounts
Adviser Expense for Adviser/ due from
Fee Reimburse- Transfer Goldman
Fund Waived ments Total Agent Fees Sachs
================================================================================
Prime
Obligations
Portfolio $-- $234 $234 $462 $18
- --------------------------------------------------------------------------------
Money
Market
Portfolio 493 243 736 318 34
- --------------------------------------------------------------------------------
Government
Portfolio -- 232 232 265 45
- --------------------------------------------------------------------------------
Treasury
Obligations
Portfolio -- 213 213 267 --
- --------------------------------------------------------------------------------
Treasury
Instruments
Portfolio 2,074 221 2,295 180 10
- --------------------------------------------------------------------------------
Federal
Portfolio 4,070 452 4,522 648 126
- --------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio 1,540 25 1,565 399 --
- --------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio -- 22 22 147 --
- -------------------------------------------------------------------------------
Tax-Exempt
New York
Portfolio 92 16 108 26 --
- -------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
4. Administration and Service Plans
ILA has adopted Administration and Service Plans. These plans allow for ILA
Administration units and ILA Service units, respectively, to compensate service
organizations for providing varying levels of account administration and
unitholder liaison services to their customers who are beneficial owners of such
units. The Administration and Service Plans provide for compensation to the
service organizations in an amount up to .15% and .40% (on an annualized basis),
respectively, of the average daily net asset value of the respective units.
5. Line of Credit Facility
ILA participates in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Portfolio must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended
December 31, 1996, ILA did not have any borrowings under this facility.
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping by the custodian.
7. Joint Repurchase Agreement Accounts
The ILA Portfolios, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, may transfer uninvested cash
balances into joint accounts, the daily aggregate balances of which are invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations.
As of December 31, 1996, the Prime Obligations, Money Market, Government and
Treasury Obligations Portfolios had investments in the following joint account
of $21,400,000, $77,200,000, $305,000,000 and $327,900,000 in principal amount,
respectively. As of December 31, 1996, the repurchase agreements in this joint
account, along with the corresponding underlying securities (including the type
of security, market value, interest rate and maturity date), were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933
(U.S. Treasury Notes: $129,531,177, 4.75%-8.88%,01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
================================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Portfolio may enter into
certain principal transactions, including repurchase agreements, with Goldman,
Sachs & Co. subject to certain limitations which include the following: 25% of
eligible security transactions, as defined, and 10% of repurchase agreement
transactions.
- --------------------------------------------------------------------------------
34
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end Total
of period income transactions operations to unitholders of period return/(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... $1.00 $0.0511 -- $0.0511 $(0.0511) $1.00 5.22%
1996-ILA Administration units ....... 1.00 0.0497 -- 0.0497 (0.0497) 1.00 5.06
1996-ILA Service units .............. 1.00 0.0474 -- 0.0474 (0.0474) 1.00 4.80
1996-ILA B units/(b)/................ 1.00 0.0262 -- 0.0262 (0.0262) 1.00 3.97/(d)/
1995-ILA units ...................... 1.00 0.0566 -- 0.0566 (0.0566) 1.00 5.79
1995-ILA Administration units ....... 1.00 0.0551 -- 0.0551 (0.0551) 1.00 5.63
1995-ILA Service units .............. 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.37
1994-ILA units ...................... 1.00 0.0394 -- 0.0394 (0.0394) 1.00 4.07
1994-ILA Administration units ....... 1.00 0.0379 -- 0.0379 (0.0379) 1.00 3.91
1994-ILA Service units .............. 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.66
1993-ILA units ...................... 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00 2.97
1993-ILA Administration units ....... 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00 2.82
1993-ILA Service units .............. 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00 2.56
1992-ILA units ...................... 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00 3.75
1992-ILA Administration units ....... 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00 3.60
1992-ILA Service units .............. 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00 3.34
1991-ILA units ...................... 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00 6.10
1991-ILA Administration units ....... 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00 5.94
1991-ILA Service units .............. 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00 5.68
1990-ILA units ...................... 1.00 0.0793 -- 0.0793 (0.0793) 1.00 8.21
1990-ILA Administration units /(c)/.. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.81/(d)/
1990-ILA Service units/(c)/.......... 1.00 0.0425 -- 0.0425 (0.0425) 1.00 7.56/(d)/
1989-ILA units ...................... 1.00 0.0890 -- 0.0890 (0.0890) 1.00 9.27
1988-ILA units ...................... 1.00 0.0714 -- 0.0714 (0.0714) 1.00 7.48
1987-ILA units ...................... 1.00 0.0634 -- 0.0634 (0.0634) 1.00 6.50
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
===========================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... 0.41% 5.11% $1,154,787 0.43% 5.09%
1996-ILA Administration units ....... 0.56 4.97 23,738 0.58 4.95
1996-ILA Service units .............. 0.81 4.74 84,707 0.83 4.72
1996-ILA B units/(b)/................ 1.41/(d)/ 4.09/(d)/ 346 1.43/(d)/ 4.07/(d)/
1995-ILA units ...................... 0.41 5.66 1,261,251 0.43 5.64
1995-ILA Administration units ....... 0.56 5.51 63,018 0.58 5.49
1995-ILA Service units .............. 0.81 5.22 227,233 0.83 5.20
1994-ILA units ...................... 0.40 3.94 1,963,846 0.42 3.92
1994-ILA Administration units ....... 0.55 3.79 149,234 0.57 3.77
1994-ILA Service units .............. 0.80 3.65 170,453 0.82 3.63
1993-ILA units ...................... 0.40 2.91 2,332,771 0.42 2.89
1993-ILA Administration units ....... 0.55 2.75 189,431 0.57 2.73
1993-ILA Service units .............. 0.80 2.50 137,804 0.82 2.48
1992-ILA units ...................... 0.40 3.64 3,444,591 0.42 3.62
1992-ILA Administration units ....... 0.55 3.39 257,321 0.57 3.37
1992-ILA Service units .............. 0.80 3.11 22,044 0.82 3.09
1991-ILA units ...................... 0.40 5.91 3,531,736 0.42 5.89
1991-ILA Administration units ....... 0.55 5.68 198,417 0.57 5.66
1991-ILA Service units .............. 0.80 5.58 18,789 0.82 5.56
1990-ILA units ...................... 0.38 7.93 2,833,541 0.38 7.93
1990-ILA Administration units /(c)/.. 0.55/(d)/ 7.62/(d)/ 209,272 0.55/(d)/ 7.62/(d)/
1990-ILA Service units/(c)/.......... 0.80/(d)/ 7.25/(d)/ 19,039 0.80/(d)/ 7.25/(d)/
1989-ILA units ...................... 0.40 8.90 3,761,964 0.40 8.90
1988-ILA units ...................... 0.40 7.14 3,799,628 0.40 7.14
1987-ILA units ...................... 0.40 6.34 5,814,280 0.40 6.34
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ILA Class B unit activity commenced during May of 1996.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
/(d)/Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. $1.00 $0.0515 $0.0001 $0.0516 $(0.0516) $1.00 5.27%
1996-ILA Administration
units ................... 1.00 0.0500 0.0001 0.0501 (0.0501) 1.00 5.12
1996-ILA Service units ..... 1.00 0.0475 0.0001 0.0476 (0.0476) 1.00 4.86
1995-ILA units ............. 1.00 0.0571 -- 0.0571 (0.0571) 1.00 5.85
1995-ILA Administration
units ................... 1.00 0.0555 -- 0.0555 (0.0555) 1.00 5.69
1995-ILA Service units ..... 1.00 0.0529 -- 0.0529 (0.0529) 1.00 5.43
1994-ILA units ............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.13
1994-ILA Administration
units ................... 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.98
1994-ILA Service units ..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.72
1993-ILA units ............. 1.00 0.0296 0.0003 0.0299 (0.0299) 1.00 3.03
1993-ILA Administration
units ................... 1.00 0.0281 0.0003 0.0284 (0.0284) 1.00 2.88
1993-ILA Service units ..... 1.00 0.0257 0.0002 0.0259 (0.0259) 1.00 2.62
1992-ILA units ............. 1.00 0.0368 0.0004 0.0372 (0.0372) 1.00 3.76
1992-ILA Administration
units ................... 1.00 0.0356 0.0004 0.0360 (0.0360) 1.00 3.61
1992-ILA Service units ..... 1.00 0.0358 0.0006 0.0364 (0.0364) 1.00 3.35
1991-ILA units ............. 1.00 0.0591 0.0004 0.0595 (0.0595) 1.00 6.12
1991-ILA Administration
units ................... 1.00 0.0574 0.0004 0.0578 (0.0578) 1.00 5.96
1991-ILA Service units ..... 1.00 0.0547 0.0004 0.0551 (0.0551) 1.00 5.70
1990-ILA units ............. 1.00 0.0793 0.0001 0.0794 (0.0794) 1.00 8.24
1990-ILA Administration
units/(c)/............... 1.00 0.0424 0.0001 0.0425 (0.0425) 1.00 7.86/(b)/
1990-ILA Service units/(c)/. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.61/(b)/
1989-ILA units ............. 1.00 0.0885 0.0001 0.0886 (0.0886) 1.00 9.31
1988-ILA units ............. 1.00 0.0751 -- 0.0751 (0.0751) 1.00 7.66
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 1.00 0.0063 -- 0.0063 (0.0063) 1.00 7.38/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. 0.36% 5.15% $703,097 0.43% 5.08%
1996-ILA Administration
units ................... 0.51 5.00 257,258 0.58 4.93
1996-ILA Service units ..... 0.76 4.75 28,845 0.83 4.68
1995-ILA units ............. 0.36 5.71 574,155 0.42 5.65
1995-ILA Administration
units ................... 0.51 5.55 164,422 0.57 5.49
1995-ILA Service units ..... 0.76 5.29 23,080 0.82 5.23
1994-ILA units ............. 0.35 4.01 559,470 0.43 3.93
1994-ILA Administration
units ................... 0.50 3.88 145,867 0.58 3.80
1994-ILA Service units ..... 0.75 3.61 21,862 0.83 3.53
1993-ILA units ............. 0.35 2.96 699,604 0.43 2.88
1993-ILA Administration
units ................... 0.50 2.81 150,452 0.58 2.73
1993-ILA Service units ..... 0.75 2.57 11,166 0.83 2.49
1992-ILA units ............. 0.35 3.68 884,571 0.43 3.60
1992-ILA Administration
units ................... 0.50 3.56 187,445 0.58 3.48
1992-ILA Service units ..... 0.75 3.58 15,114 0.83 3.50
1991-ILA units ............. 0.35 5.91 1,153,191 0.42 5.84
1991-ILA Administration
units ................... 0.50 5.74 210,330 0.57 5.67
1991-ILA Service units ..... 0.75 5.47 56,586 0.82 5.40
1990-ILA units ............. 0.35 7.93 924,141 0.40 7.88
1990-ILA Administration
units/(c)/............... 0.50/(b)/ 7.63/(b)/ 204,477 0.55/(b)/ 7.58/(b)/
1990-ILA Service units/(c)/. 0.75/(b)/ 7.46/(b)/ 38,128 0.80/(b)/ 7.41/(b)/
1989-ILA units ............. 0.35 8.85 1,295,389 0.40 8.80
1988-ILA units ............. 0.27 7.51 701,105 0.40 7.38
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 0.15/(b)/ 7.62/(b)/ 183,633 0.40/(b)/ 7.37/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (gain) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0504 $ 0.0001 $0.0505 $(0.0504) $1.00 5.15%
1996-ILA Administration
units ................... 1.00 0.0489 0.0001 0.0490 (0.0489) 1.00 4.99
1996-ILA Service units ..... 1.00 0.0463 0.0001 0.0464 (0.0463) 1.00 4.73
1995-ILA units ............. 1.00 0.0562 0.0002 0.0564 (0.0564) 1.00 5.77
1995-ILA Administration
units ................... 1.00 0.0549 0.0002 0.0551 (0.0551) 1.00 5.62
1995-ILA Service units ..... 1.00 0.0519 0.0002 0.0521 (0.0521) 1.00 5.35
1994-ILA units ............. 1.00 0.0378 0.0002 0.0380 (0.0380) 1.00 3.94
1994-ILA Administration
units ................... 1.00 0.0362 0.0002 0.0364 (0.0364) 1.00 3.79
1994-ILA Service units ..... 1.00 0.0350 0.0002 0.0352 (0.0352) 1.00 3.53
1993-ILA units ............. 1.00 0.0282 0.0008 0.0290 (0.0291) 1.00 2.94
1993-ILA Administration 1.00 0.0267 0.0008 0.0275 (0.0276) 1.00 2.79
units ...................
1993-ILA Service units ..... 1.00 0.0242 0.0006 0.0248 (0.0250) 1.00 2.53
1992-ILA units ............. 1.00 0.0338 0.0027 0.0365 (0.0364) 1.00 3.70
1992-ILA Administration
units ................... 1.00 0.0325 0.0027 0.0352 (0.0351) 1.00 3.55
1992-ILA Service units ..... 1.00 0.0309 0.0030 0.0339 (0.0336) 1.00 3.29
1991-ILA units ............. 1.00 0.0567 0.0011 0.0578 (0.0578) 1.00 5.91
1991-ILA Administration
units ................... 1.00 0.0545 0.0011 0.0556 (0.0556) 1.00 5.75
1991-ILA Service units ..... 1.00 0.0522 0.0011 0.0533 (0.0533) 1.00 5.49
1990-ILA units ............. 1.00 0.0779 0.0003 0.0782 (0.0782) 1.00 8.11
1990-ILA Administration
units (c)................ 1.00 0.0439 0.0004 0.0443 (0.0443) 1.00 7.74/(b)/
1990-ILA Service units (c).. 1.00 0.0359 0.0002 0.0361 (0.0363) 1.00 7.42/(b)/
1989-ILA units ............. 1.00 0.0877 0.0001 0.0878 (0.0878) 1.00 9.15
1988-ILA units ............. 1.00 0.0716 0.0002 0.0718 (0.0718) 1.00 7.42
1987-ILA units ............. 1.00 0.0622 0.0001 0.0623 (0.0624) 1.00 6.43
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.41% 5.04% $694,651 0.44% 5.01%
1996-ILA Administration
units ................... 0.56 4.89 36,055 0.59 4.86
1996-ILA Service units ..... 0.81 4.63 94,228 0.84 4.60
1995-ILA units ............. 0.41 5.62 570,469 0.43 5.60
1995-ILA Administration
units ................... 0.56 5.49 47,558 0.58 5.47
1995-ILA Service units ..... 0.81 5.19 85,401 0.83 5.17
1994-ILA units ............. 0.40 3.78 881,520 0.44 3.74
1994-ILA Administration
units ................... 0.55 3.62 95,483 0.59 3.58
1994-ILA Service units ..... 0.80 3.50 156,930 0.84 3.46
1993-ILA units ............. 0.40 2.82 1,315,378 0.43 2.79
1993-ILA Administration
units ................... 0.55 2.67 161,845 0.58 2.64
1993-ILA Service units ..... 0.80 2.42 101,272 0.83 2.39
1992-ILA units ............. 0.40 3.38 1,785,472 0.42 3.36
1992-ILA Administration
units ................... 0.55 3.25 461,542 0.57 3.23
1992-ILA Service units ..... 0.80 3.09 56,389 0.82 3.07
1991-ILA units ............. 0.40 5.67 2,103,627 0.43 5.64
1991-ILA Administration
units ................... 0.55 5.45 464,060 0.58 5.42
1991-ILA Service units ..... 0.80 5.22 200,176 0.83 5.19
1990-ILA units ............. 0.39 7.79 2,203,756 0.39 7.79
1990-ILA Administration
units (c)................ 0.55/(b) 7.49/(b)/ 296,313 0.55/(b)/ 7.49/(b)/
1990-ILA Service units (c).. 0.80/(b)/ 7.15/(b)/ 132,888 0.80/(b)/ 7.15/(b)/
1989-ILA units ............. 0.40 8.77 2,268,330 0.40 8.77
1988-ILA units ............. 0.40 7.16 2,197,796 0.40 7.16
1987-ILA units ............. 0.40 6.22 2,243,870 0.40 6.22
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end of Total
of period income transaction operation to unitholders period return/(a)/
====================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ............................. $1.00 $0.0498 $0.0002 $0.0500 $(0.0500) $1.00 5.11%
1996-ILA Administration units .............. 1.00 0.0483 0.0003 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..................... 1.00 0.0459 0.0001 0.0460 (0.0460) 1.00 4.69
1995-ILA units ............................. 1.00 0.0551 0.0007 0.0558 (0.0558) 1.00 5.73
1995-ILA Administration units .............. 1.00 0.0537 0.0007 0.0544 (0.0544) 1.00 5.57
1995-ILA Service units ..................... 1.00 0.0511 0.0007 0.0518 (0.0518) 1.00 5.31
1994-ILA units ............................. 1.00 0.0377 -- 0.0377 (0.0377) 1.00 3.91
1994-ILA Administration units .............. 1.00 0.0368 -- 0.0368 (0.0368) 1.00 3.75
1994-ILA Service units ..................... 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.49
1993-ILA units ............................. 1.00 0.0279 0.0006 0.0285 (0.0286) 1.00 2.89
1993-ILA Administration units .............. 1.00 0.0264 0.0006 0.0270 (0.0270) 1.00 2.74
1993-ILA Service units ..................... 1.00 0.0239 0.0006 0.0245 (0.0246) 1.00 2.48
1992-ILA units ............................. 1.00 0.0339 0.0025 0.0364 (0.0362) 1.00 3.65
1992-ILA Administration units .............. 1.00 0.0320 0.0023 0.0343 (0.0343) 1.00 3.49
1992-ILA Service units ..................... 1.00 0.0294 0.0024 0.0318 (0.0318) 1.00 3.23
1991-ILA units ............................. 1.00 0.0557 0.0018 0.0575 (0.0575) 1.00 5.90
1991-ILA Administration units .............. 1.00 0.0540 0.0018 0.0558 (0.0558) 1.00 5.74
1991-ILA Service units ..................... 1.00 0.0515 0.0018 0.0533 (0.0533) 1.00 5.48
1990-ILA units ............................. 1.00 0.0772 0.0002 0.0774 (0.0774) 1.00 8.05
1990-ILA Administration units /(c)/......... 1.00 0.0413 0.0002 0.0415 (0.0415) 1.00 7.67/(b)/
1990-ILA Service units /(c)/................ 1.00 0.0417 0.0003 0.0420 (0.0421) 1.00 7.42/(b)/
1989-ILA units ............................. 1.00 0.0864 0.0005 0.0869 (0.0869) 1.00 9.06
1988-ILA units ............................. 1.00 0.0704 0.0004 0.0708 (0.0708) 1.00 7.30
1987-ILA units ............................. 1.00 0.0617 0.0002 0.0619 (0.0619) 1.00 6.32
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
======================
Ratio Ratio of net Ratio of net
of net investment Net Ratio of net investment
expenses income to assets at expenses to income to
to average of average end of period average net average net
net assets net assets (in 000's) assets assets
=============================================================================
For the Years Ended December 31,
================================
1996-ILA units .................................. 0.41% 4.98% $574,734 0.43% 4.96%
1996-ILA Administration units ................... 0.56 4.83 108,850 0.58 4.81
1996-ILA Service units .......................... 0.81 4.59 123,483 0.83 4.57
1995-ILA units .................................. 0.41 5.51 711,209 0.43 5.49
1995-ILA Administration units ................... 0.56 5.37 92,643 0.58 5.35
1995-ILA Service units .......................... 0.81 5.11 119,692 0.83 5.09
1994-ILA units .................................. 0.40 3.77 713,816 0.44 3.73
1994-ILA Administration units ................... 0.55 3.68 97,626 0.59 3.64
1994-ILA Service units .......................... 0.80 3.40 108,972 0.84 3.35
1993-ILA units .................................. 0.40 2.79 969,565 0.43 2.76
1993-ILA Administration units ................... 0.55 2.64 121,327 0.58 2.61
1993-ILA Service units .......................... 0.80 2.39 185,506 0.83 2.36
1992-ILA units .................................. 0.40 3.39 1,328,036 0.43 3.36
1992-ILA Administration units ................... 0.55 3.20 152,804 0.58 3.17
1992-ILA Service units .......................... 0.80 2.94 183,208 0.83 2.91
1991-ILA units .................................. 0.40 5.57 1,709,321 0.43 5.54
1991-ILA Administration units ................... 0.55 5.40 146,795 0.58 5.37
1991-ILA Service units .......................... 0.80 5.15 154,419 0.83 5.12
1990-ILA units .................................. 0.39 7.72 1,816,991 0.39 7.72
1990-ILA Administration units /(c)/.............. 0.55/(b)/ 7.42/(b)/ 132,088 0.55/(b)/ 7.42/(b)/
1990-ILA Service units /(c)/..................... 0.80/(b)/ 7.11/(b)/ 148,323 0.80/(b)/ 7.11/(b)/
1989-ILA units .................................. 0.40 8.64 1,769,974 0.40 8.64
1988-ILA units .................................. 0.40 7.04 1,657,215 0.40 7.04
1987-ILA units .................................. 0.40 6.17 1,693,767 0.40 6.17
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
========================================
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total /(a)/
of period income transcations operations unitholders of period return
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0496 $0.0004 $0.0500 $(0.0500) $1.00 5.10%
1996-ILA Administration
units ................... 1.00 0.0482 0.0004 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..... 1.00 0.0456 0.0004 0.0460 (0.0460) 1.00 4.68
1995-ILA units ............. 1.00 0.0550 0.0006 0.0556 (0.0556) 1.00 5.70
1995-ILA Administration
units ................... 1.00 0.0534 0.0007 0.0541 (0.0540) 1.00 5.54
1995-ILA Service units ..... 1.00 0.0500 0.0005 0.0505 (0.0505) 1.00 5.28
1994-ILA units ............. 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 4.01
1994-ILA Administration
units ................... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 3.85
1994-ILA Service units ..... 1.00 0.0371 0.0001 0.0372 (0.0372) 1.00 3.59
1993-ILA units ............. 1.00 0.0288 0.0006 0.0294 (0.0294) 1.00 2.98
1993-ILA Administration
units ................... 1.00 0.0273 0.0006 0.0279 (0.0279) 1.00 2.83
1993-ILA Service units ..... 1.00 0.0248 0.0006 0.0254 (0.0254) 1.00 2.57
1992-ILA units ............. 1.00 0.0338 0.0012 0.0350 (0.0350) 1.00 3.54
1992-ILA Administration
units ................... 1.00 0.0326 0.0012 0.0338 (0.0338) 1.00 3.38
1992-ILA Service units ..... 1.00 0.0275 0.0011 0.0286 (0.0286) 1.00 3.13
For the Period January 30, 1991 (commencement of operations) through December 31,
=================================================================================
1991-ILA units ............. 1.00 0.0486 0.0013 0.0499 (0.0499) 1.00 5.75/(b)/
1991-ILA Administration
units /(c)/.............. 1.00 0.0210 0.0010 0.0220 (0.0220) 1.00 5.21/(b)/
1991-ILA Service units /(c)/ 1.00 0.0473 0.0009 0.0482 (0.0482) 1.00 5.33/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
====================================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
=============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.21% 4.96% $708,999 0.43% 4.74%
1996-ILA Administration
units ................... 0.36 4.82 137,706 0.58 4.60
1996-ILA Service units ..... 0.61 4.56 383,901 0.83 4.34
1995-ILA units ............. 0.21 5.50 586,294 0.44 5.27
1995-ILA Administration
units ................... 0.36 5.34 68,713 0.59 5.11
1995-ILA Service units ..... 0.61 5.00 123,254 0.84 4.77
1994-ILA units ............. 0.20 3.96 547,351 0.43 3.73
1994-ILA Administration
units ................... 0.35 3.97 64,388 0.58 3.74
1994-ILA Service units ..... 0.60 3.72 74,451 0.83 3.49
1993-ILA units ............. 0.20 2.88 456,411 0.44 2.64
1993-ILA Administration
units ................... 0.35 2.73 26,553 0.59 2.49
1993-ILA Service units ..... 0.60 2.48 34,014 0.84 2.24
1992-ILA units ............. 0.18 3.38 422,506 0.45 3.11
1992-ILA Administration
units ................... 0.33 3.26 6,915 0.60 2.99
1992-ILA Service units ..... 0.58 2.75 29,522 0.85 2.48
For the Period January 30, 1991 through December 31,
====================================================
1991-ILA units ............. 0.10/(b)/ 5.28/(b)/ 424,436 0.45/(b)/ 4.93/(b)/
1991-ILA Administration
units /(c)/.............. 0.25/(b)/ 4.77/(b)/ 17,649 0.60/(b)/ 4.42/(b)/
1991-ILA Service units /(c)/ 0.50/(b)/ 5.13/(b)/ 9,430 0.85/(b)/ 4.78/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during July and
January of 1991, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Net
asset Net realized Total
value at gain income Net asset
beginning Net on from Distributions value at
of investment investment investment to end Total
period income transactions operations unitholders of period return(a)
======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... $1.00 $0.0513 -- $0.0513 $(0.0513) $1.00 5.24%
1996-ILA Administration units......... 1.00 0.0498 -- 0.0498 (0.0498) 1.00 5.09
1996-ILA Service units ............... 1.00 0.0473 -- 0.0473 (0.0473) 1.00 4.83
1995-ILA units ....................... 1.00 0.0569 -- 0.0569 (0.0569) 1.00 5.83
1995-ILA Administration units ........ 1.00 0.0550 -- 0.0550 (0.0550) 1.00 5.67
1995-ILA Service units ............... 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.41
1994-ILA units ....................... 1.00 0.0407 -- 0.0407 (0.0407) 1.00 4.11
1994-ILA Administration units ........ 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.95
1994-ILA Service units ............... 1.00 0.0392 -- 0.0392 (0.0392) 1.00 3.69
1993-ILA units ....................... 1.00 0.0296 -- 0.0296 (0.0296) 1.00 3.00
1993-ILA Administration units ........ 1.00 0.0281 -- 0.0281 (0.0281) 1.00 2.84
1993-ILA Service units/(c)/........... 1.00 0.0157 -- 0.0157 (0.0157) 1.00 2.56/(b)/
1992-ILA units ....................... 1.00 0.0358 -- 0.0358 (0.0358) 1.00 3.61
1992-ILA Administration units ........ 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.46
1991-ILA units ....................... 1.00 0.0576 -- 0.0576 (0.0576) 1.00 5.94
1991-ILA Administration units ........ 1.00 0.0542 -- 0.0542 (0.0542) 1.00 5.78
1991-ILA Service units/(c)/........... 1.00 0.0196 -- 0.0196 (0.0196) 1.00 5.55/(b)/
1990-ILA units ....................... 1.00 0.0772 -- 0.0772 (0.0772) 1.00 8.06
1990-ILA Administration units/(d)/.... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 7.39/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 1.00 0.0516 -- 0.0516 (0.0516) 1.00 7.62(b)
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
====================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... 0.26% 5.13% $2,303,677 0.43% 4.96%
1996-ILA Administration units......... 0.41 4.98 794,537 0.58 4.81
1996-ILA Service units ............... 0.66 4.73 192,416 0.83 4.56
1995-ILA units ....................... 0.26 5.69 1,731,935 0.42 5.53
1995-ILA Administration units ........ 0.41 5.50 516,917 0.57 5.34
1995-ILA Service units ............... 0.66 5.22 102,576 0.82 5.06
1994-ILA units ....................... 0.25 4.07 1,625,567 0.42 3.90
1994-ILA Administration units ........ 0.40 3.88 329,896 0.57 3.71
1994-ILA Service units ............... 0.65 3.92 15,539 0.82 3.75
1993-ILA units ....................... 0.25 2.96 1,430,292 0.42 2.79
1993-ILA Administration units ........ 0.40 2.81 362,401 0.57 2.64
1993-ILA Service units/(c)/........... 0.65/(b)/ 2.54/(b)/ 1,425 0.82/(b)/ 2.37/(b)/
1992-ILA units ....................... 0.25 3.58 1,600,989 0.42 3.41
1992-ILA Administration units ........ 0.40 3.40 312,792 0.57 3.23
1991-ILA units ....................... 0.25 5.76 1,656,232 0.42 5.59
1991-ILA Administration units ........ 0.40 5.42 291,810 0.57 5.25
1991-ILA Service units/(c)/........... 0.65/(b)/ 5.56/(b)/ -- 0.82/(b)/ 5.39/(b)/
1990-ILA units ....................... 0.25 7.72 1,368,765 0.40 7.57
1990-ILA Administration units/(d)/.... 0.40/(b)/ 7.25/(b)/ 90,748 0.55/(b)/ 7.10/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 0.19/(b)/ 8.41/(b)/ 455,230 0.40/(b)/ 8.20/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Service unit activity commenced during April of 1991; no shares were
outstanding during the period from August 7, 1991 through May 15, 1993.
(d)ILA Administration unit activity commenced during September of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
======================================
Net
Net asset realized Total Net asset
value at Net gain(loss) income from value at
beginning investment on investment investment Distributions end of Total
of period income transactions operations to unitholders period return/(a)/
===============================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ..................... $1.00 $0.0320 $ $0.0320 $(0.0320) $1.00 3.25%
1996-ILA Administration units....... 1.00 0.0306 -- 0.0306 (0.0306) 1.00 3.09
1996-ILA Service units ............. 1.00 0.0279 -- 0.0279 (0.0279) 1.00 2.84
1995-ILA units ..................... 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.72
1995-ILA Administration units....... 1.00 0.0351 -- 0.0351 (0.0352) 1.00 3.57
1995-ILA Service units ............. 1.00 0.0324 -- 0.0324 (0.0325) 1.00 3.31
1994-ILA units ..................... 1.00 0.0264 -- 0.0264 (0.0264) 1.00 2.71
1994-ILA Administration units....... 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.55
1994-ILA Service units ............. 1.00 0.0220 -- 0.0220 (0.0220) 1.00 2.30
1993-ILA units ..................... 1.00 0.0222 -- 0.0222 (0.0222) 1.00 2.25
1993-ILA Administration units....... 1.00 0.0207 -- 0.0207 (0.0207) 1.00 2.09
1993-ILA Service units ............. 1.00 0.0183 -- 0.0183 (0.0183) 1.00 1.84
1992-ILA units ..................... 1.00 0.0277 -- 0.0277 (0.0277) 1.00 2.82
1992-ILA Administration units....... 1.00 0.0266 -- 0.0266 (0.0266) 1.00 2.67
1992-ILA Service units ............. 1.00 0.0243 -- 0.0243 (0.0243) 1.00 2.41
1991-ILA units ..................... 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.33
1991-ILA Administration units....... 1.00 0.0406 -- 0.0406 (0.0406) 1.00 4.17
1991-ILA Service units ............. 1.00 0.0386 -- 0.0386 (0.0386) 1.00 3.91
1990-ILA units ..................... 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00 5.64
1990-ILA Administration units /(c)/. 1.00 0.0301 -- 0.0301 (0.0300) 1.00 5.43/(b)/
1990-ILA Service units /(c)/........ 1.00 0.0259 -- 0.0259 (0.0259) 1.00 5.17/(b)/
1989-ILA units ..................... 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00 6.07
1988-ILA units ..................... 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00 5.03
1987-ILA units ..................... 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00 4.23
<CAPTION>
Ratio assuming no
waiver of fees and no
expense limitation
==============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C>
1996-ILA units ..................... 0.31% 3.20% $1,514,443 0.41% 3.10%
1996-ILA Administration units....... 0.46 3.06 59,097 0.56 2.96
1996-ILA Service units ............. 0.71 2.79 28,921 0.81 2.69
1995-ILA units ..................... 0.31 3.65 $1,342,585 0.42 3.54
1995-ILA Administration units....... 0.46 3.51 48,773 0.57 3.40
1995-ILA Service units ............. 0.71 3.24 49,647 0.82 3.13
1994-ILA units ..................... 0.30 2.64 1,434,965 0.41 2.53
1994-ILA Administration units....... 0.45 2.50 97,778 0.56 2.39
1994-ILA Service units ............. 0.70 2.20 36,492 0.81 2.09
1993-ILA units ..................... 0.30 2.22 1,769,477 0.41 2.11
1993-ILA Administration units....... 0.45 2.08 99,896 0.56 1.97
1993-ILA Service units ............. 0.70 1.83 45,172 0.81 1.72
1992-ILA units ..................... 0.30 2.77 1,333,925 0.42 2.65
1992-ILA Administration units....... 0.45 2.66 50,225 0.57 2.54
1992-ILA Service units ............. 0.70 2.43 29,534 0.82 2.31
1991-ILA units ..................... 0.32 4.24 1,044,986 0.42 4.14
1991-ILA Administration units....... 0.47 4.06 37,567 0.57 3.96
1991-ILA Service units ............. 0.72 3.86 52,399 0.82 3.76
1990-ILA units ..................... 0.40 5.50 603,895 0.40 5.50
1990-ILA Administration units /(c)/. 0.55/(b)/ 5.40/(b)/ 42,498 0.55/(b)/ 5.40/(b)/
1990-ILA Service units /(c)/........ 0.80/(b)/ 5.16/(b)/ 56,810 0.80/(b)/ 5.16/(b)/
1989-ILA units ..................... 0.40 5.91 688,556 0.40 5.91
1988-ILA units ..................... 0.40 4.87 907,782 0.40 4.87
1987-ILA units ..................... 0.40 4.13 965,714 0.40 4.13
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (loss) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. $1.00 $0.0299 -- $0.0299 $(0.0299) $1.00 3.03%
1996-ILA Administration
units ................... 1.00 0.0284 -- 0.0284 (0.0284) 1.00 2.88
1995-ILA units ............. 1.00 0.0349 -- 0.0349 (0.0350) 1.00 3.55
1995-ILA Administration
units ................... 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.40
1994-ILA units ............. 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.53
1994-ILA Administration
units ................... 1.00 0.0233 -- 0.0233 (0.0233) 1.00 2.37
1993-ILA units ............. 1.00 0.0206 -- 0.0206 (0.0206) 1.00 2.09
1993-ILA Administration
units ................... 1.00 0.0191 -- 0.0191 (0.0191) 1.00 1.93
1993-ILA Service units ..... 1.00 0.0166 -- 0.0166 (0.0166) 1.00 1.68
1992-ILA units ............. 1.00 0.0256 (0.0001) 0.0255 (0.0256) 1.00 2.62
1992-ILA Administration
units ................... 1.00 0.0235 (0.0002) 0.0233 (0.0235) 1.00 2.47
1992-ILA Service units (c).. 1.00 0.0081 -- 0.0081 (0.0081) 1.00 1.99/(b)/
1991-ILA units ............. 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.92
1991-ILA Administration
units ................... 1.00 0.0376 -- 0.0376 (0.0376) 1.00 3.80
1990-ILA units ............. 1.00 0.0511 (0.0001) 0.0510 (0.0511) 1.00 5.24
1990-ILA Administration
units (c)................ 1.00 0.0042 -- 0.0042 (0.0042) 1.00 5.14/(b)/
1989-ILA units ............. 1.00 0.0573 (0.0001) 0.0572 (0.0572) 1.00 5.93
For the Period October 3, 1988 (commencement of operations) through
December 31,
=========================================================
1988-ILA units ............. 1.00 0.0139 -- 0.0139 (0.0139) 1.00 5.81/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. 0.41% 2.99% $440,476 0.42% 2.98%
1996-ILA Administration
units ................... 0.56 2.84 142 0.57 2.83
1995-ILA units ............. 0.41 3.49 346,728 0.41 3.49
1995-ILA Administration
units ................... 0.56 3.32 61 0.56 3.32
1994-ILA units ............. 0.40 2.50 227,399 0.41 2.49
1994-ILA Administration
units ................... 0.55 2.33 790 0.56 2.32
1993-ILA units ............. 0.40 2.06 229,839 0.44 2.02
1993-ILA Administration
units ................... 0.55 1.91 1,425 0.59 1.87
1993-ILA Service units ..... 0.76 1.66 -- 0.84 1.54
1992-ILA units ............. 0.40 2.56 161,868 0.47 2.49
1992-ILA Administration
units ................... 0.55 2.35 31 0.62 2.28
1992-ILA Service units (c).. 0.80/(b)/ 3 0.87/(b)/ 1.96/(b)/
2.03(b)
1991-ILA units ............. 0.40 3.88 102,494 0.47 3.81
1991-ILA Administration
units ................... 0.55 3.76 13 0.62 3.69
1990-ILA units ............. 0.40 5.11 106,972 0.40 5.11
1990-ILA Administration
units (c)................ 0.55/(b)/ 5.33(b) 68 0.55/(b)/ 5.33/(b)/
1989-ILA units ............. 0.40 5.73 112,463 0.40 5.73
For the Period October 3, 1988 (commencement of
operations) through December 31,
=========================================================
1988-ILA units ............. 0.24/(b)/ 5.74/(b)/ 41,028 0.38/(b)/ 5.60/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during December of
1990 and August of 1992, respectively. No service shares were outstanding
for the years ended December 31, 1996, 1995, 1994.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
----------------------------------------
Net asset Net realized Total Net asset
value at Net loss income from value at
beginning investment on investment investment Distribution end Total
of period income transactions operations to unitholders of period return(a)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... $1.00 $0.0301 -- $0.0301 $(0.0301) $1.00 3.05%
1996-ILA Administration units ...... 1.00 0.0288 -- 0.0288 (0.0288) 1.00 2.90
1995-ILA units ..................... 1.00 0.0344 -- 0.0344 (0.0344) 1.00 3.51
1995-ILA Administration units ...... 1.00 0.0328 -- 0.0328 (0.0328) 1.00 3.35
1994-ILA units ..................... 1.00 0.0262 -- 0.0262 (0.0262) 1.00 2.56
1994-ILA Administration units ...... 1.00 0.0247 -- 0.0247 (0.0247) 1.00 2.41
1993-ILA units ..................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00 2.21
1993-ILA Administration units ...... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 2.05
1992-ILA units ..................... 1.00 0.0265 -- 0.0265 (0.0265) 1.00 2.71
1992-ILA Administration units ...... 1.00 0.0253 -- 0.0253 (0.0253) 1.00 2.55
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 1.00 0.0347 (0.0002) 0.0345 (0.0347) 1.00 4.02/(b)/
1991-ILA Administration units /(c)/. 1.00 0.0330 -- 0.0330 (0.0330) 1.00 3.87/(b)/
- --------------------
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... 0.32% 3.01% $70,175 0.43% 2.90%
1996-ILA Administration units ...... 0.47 2.88 44,319 0.58 2.77
1995-ILA units ..................... 0.30 3.44 90,537 0.44 3.30
1995-ILA Administration units ...... 0.45 3.28 26,724 0.59 3.14
1994-ILA units ..................... 0.24 2.62 84,517 0.47 2.39
1994-ILA Administration units ...... 0.39 2.47 38,970 0.62 2.24
1993-ILA units ..................... 0.10 2.21 48,367 0.51 1.80
1993-ILA Administration units ...... 0.25 2.05 20,306 0.66 1.64
1992-ILA units ..................... 0.10 2.65 16,844 0.57 2.18
1992-ILA Administration units ...... 0.25 2.53 14,641 0.72 2.06
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 0.10/(b)/ 3.96/(b)/ 11,070 0.76/(b)/ 3.30/(b)/
1991-ILA Administration units/(c)/.. 0.25/(b)/ 3.90/(b)/ 19,198 0.91/(b)/ 3.24/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration unit activity commenced during February of 1991.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Unitholders and Board of Trustees of Goldman Sachs Money Market
Trust--Institutional Liquid Assets:
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Money Market Trust--Institutional Liquid Assets (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Government,
Treasury Obligations, Treasury Instruments, Federal, Tax-Exempt Diversified,
Tax-Exempt California and Tax-Exempt New York Portfolios), including the
statements of investments as of December 31, 1996, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Institutional Liquid Assets as of December 31, 1996, the results
of their operations for the year then ended, the changes in their net assets and
the financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- -------------------------------------- ----------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- -----------------------------------------
[This page intentionally left blank]
- -------------------------------------- -----------------------------------------
45
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------ -----------------------------------------
[This page intentionally left blank]
- ------------------------------------ -----------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market
Trust--Institutional Liquid Assets Portfolios' Prospectus which contains facts
concerning each Fund's objectives and policies, management, expenses and other
information.
- --------------------------------------------------------------------------------
47
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Institutional
Liquid Assets
- --------------------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Portfolio
Money Market Portfolio
Government Portfolio
Treasury Obligations Portfolio
Treasury Instruments Portfolio
Federal Portfolio
Tax-Exempt Diversified Portfolio
Tax-Exempt California Portfolio
Tax-Exempt New York Portfolio
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories.
The modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term debt
obligations. Prime-1 or P-1 repayment ability will often be evidenced by many of
the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-1
<PAGE>
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG to reflect such characteristics as payment upon periodic demand rather than
fixed maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the
A-2
<PAGE>
obligor's capacity to meet its financial commitment on the obligation is still
strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the
addition of a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for
A-3
<PAGE>
bonds to denote the long-term maturity and the commercial paper rating symbols
for the put option (for example, "AAA/A-1+"). With short-term demand debt,
S&P's note rating symbols are used with the commercial paper rating symbols (for
example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: The highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and -, in the AA and A categories for
long-term fixed income securities. The modifier + indicates that the security
ranks in the higher end of the category: the modifier AA or A indicates a mid-
range ranking; and the modifier - indicates that the issue ranks in the lower
end of the category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for short-term debt. The rating D-1+ indicates
that the security has the highest certainty of timely payment, short-term
liquidity is clearly 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.
A-4
<PAGE>
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay its obligations, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
A: Bonds which are rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories
to indicate the relative position of a credit within the rating category.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity
for timely repayment. Where issues possess a particularly strong credit feature
a rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
A-5
<PAGE>
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates an extremely high ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk,
compared to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
/1/ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these
securities on the date of the Portfolios' taxable year end.
A-6
<PAGE>
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 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 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 Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, Service Organizations, as defined below, will be assigned
an Account 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/holdings, and guide
<PAGE>
Service Organizations through operational details. A Goldman Sachs client can
also utilize the SMART personal computer software system which allows Service
Organizations to purchase and redeem units and also obtain Portfolio and account
information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with 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............ 46
The Adviser, Distributor and
Transfer Agent................... 52
Portfolio Transactions........... 58
Net Asset Value.................. 60
Redemptions...................... 62
Calculation of Yield Quotations.. 62
Tax Information.................. 67
Organization and Capitalization.. 73
Custodian and Subcustodian....... 79
Independent Accountants.......... 79
Financial Statements............. 79
Administration Plan.............. 80
Appendix A (Description of
Securities Ratings).............. A-1
</TABLE>
3
<PAGE>
INVESTMENT POLICIES AND PRACTICES
OF THE PORTFOLIOS
The following discussion elaborates on the description of each
Portfolio's investment policies and practices contained in the Prospectus:
U.S. GOVERNMENT SECURITIES
Each Portfolio may invest in separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities program ("STRIPS"). Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
CUSTODIAL RECEIPTS
Each Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Federal Portfolio and Government Portfolio) may also
acquire custodial receipts that evidence 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 specific merchandise, which
are "accepted" by a bank, meaning, in
4
<PAGE>
effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
The Prime Obligations Portfolio and Money Market Portfolio may invest
in short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity date and may have either a
fixed or variable interest rate that is based on an index and guaranteed for a
set time period. Because there is no secondary market for these investments,
any such funding agreement purchased by a Portfolio will be regarded as
illiquid.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may
enter into repurchase agreements only with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios'
custodian or subcustodian. The repurchase price may be higher than the purchase
price, the difference being income to the Portfolio, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Obligation
subject to the repurchase agreement.
Repurchase agreements pose certain risks for all entities, including
the Portfolios, that utilize them. Such risks are not unique to the Portfolios
but are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by, among others, the means indicated below, but because of the inherent
legal
5
<PAGE>
uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally, for tax purposes, a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller.
If in the event of bankruptcy or insolvency proceedings against the
seller of the Obligation, a court holds that the Portfolio does not have a
perfected security interest in the Obligation, the Portfolio may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Portfolio would be at risk
of losing some or all of the principal and income involved in the transaction.
To minimize this risk, the Portfolios utilize custodians and subcustodians that
the Adviser believes follow 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, each Portfolio (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advisory
agreements with the Adviser or any of its affiliates, may transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements.
6
<PAGE>
FOREIGN SECURITIES
The Money Market Portfolio may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios may also
invest in municipal instruments backed by letters of credit issued by certain of
such banks. Under current Securities and Exchange Commission ("SEC") rules
relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
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 securitized in pass-through structures
similar to the mortgage pass-through structures. Consistent with their
respective investment objectives and policies, the Portfolios may invest in
7
<PAGE>
these and other types of asset-backed securities that may be developed in the
future. This Statement of Additional Information will be amended or supplemented
as necessary to reflect the Prime Obligations and Money Market Portfolios'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, a Portfolio will generally not invest in an asset-backed security if
the income received with respect to its investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments in response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-
backed securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default
8
<PAGE>
by an obligor or servicer. Liquidity protection refers to the provision of
advances, generally by the entity administering the pool of assets, to ensure
that the receipt of payments on the losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection
may be provided through guarantees, policies or letters of credit obtained by
the issuer or sponsor from third parties, through various means of structuring
the transactions or through a combination of such approaches. The degree of
credit support provided for each issue is generally based on historical
information reflecting the level of credit risk associated with the underlying
assets. Delinquency or loss in excess of that anticipated or failure of the
credit support could adversely affect the value of or return on an investment in
such a security.
The availability of asset-backed securities may be affected by
legislative or regulatory developments. It is possible that such developments
could require the Prime Obligations and Money Market Portfolios to dispose of
any then existing holdings of such securities.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Portfolio may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis. These transactions
involve a commitment by the Portfolio to purchase or sell securities at a future
date. The price of the 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 trans-actions are negotiated directly
with the other party, and such commitments are not traded on exchanges, but may
be traded over-the-counter.
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or negotiate a commitment after entering into it. A
Portfolio also may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. The Portfolio
may realize a capital gain or loss in connection with these transactions;
distributions from any net capital gains would be taxable to its unitholders.
For purposes of determining a Portfolio's average dollar weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio's custodian or subcustodian will maintain in a
segregated account cash or liquid assets having a value (determined daily) at
least equal to the amount of the Portfolio's purchase commitments. In the case
of a forward
9
<PAGE>
commitment to sell portfolio securities subject to such commitment, the
custodian or subcustodian will hold the portfolio securities in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Portfolio will maintain sufficient assets at all times to cover
its obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable amount master demand
notes. These obligations permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. Variable amount master demand notes are direct
lending arrangements between the lender and borrower and are not generally
transferable, nor are they ordinarily rated. A Portfolio may invest in them
only if the Adviser believes that the notes are of comparable quality to the
other obligations in which that Portfolio may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable and floating rate demand
instruments that are tax exempt municipal obligations or other debt securities
that possess a floating or variable interest rate adjustment formula. These
instruments permit a Portfolio to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Portfolio may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days' notice. Still others are automatically called by the
issuer unless the Portfolio instructs otherwise. The Trust, on behalf of the
Portfolios, intends to exercise the demand only (1) upon a default under the
terms of the debt security, (2) as needed to provide liquidity to a Portfolio,
(3) to maintain the respective quality standards of a Portfolio's investment
portfolio, or (4) to attain a more optimal portfolio structure. A Portfolio
will determine the variable or floating rate demand instruments that it will
purchase in accordance with procedures approved by the Trustees to minimize
credit risks. To be eligible for purchase by a Portfolio, a variable or
floating rate demand instrument which is unrated must have high quality
characteristics similar to other obligations in
10
<PAGE>
which the Portfolio may invest. The Adviser may determine that an unrated
variable or floating rate demand instrument meets a Portfolio's quality criteria
by reason of being backed by a letter of credit or guarantee issued by a bank
that meets the quality criteria for the Portfolio. Thus, either the credit of
the issuer of the obligation or the guarantor bank or both will meet the quality
standards of the Portfolio.
The maturity of the variable or floating rate demand instruments held
by a Portfolio will ordinarily be deemed to be the longer of (1) the notice
period required before the Portfolio is entitled to receive payment of the
principal amount of the instrument or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Portfolio must also meet the requirements of
rules issued by the SEC applicable to the use of the amortized cost method of
securities valuation. The Portfolios will also consider the liquidity of the
market for variable and floating rate instruments, and in the event that such
instruments are illiquid, the Portfolios' investments in such instruments will
be subject to the limitation on illiquid investments.
A Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Government Portfolio and Federal Portfolio) may invest in
participation interests in variable or floating rate tax-exempt obligations held
by financial institutions (usually commercial banks). Such participation
interests provide the Portfolio with a specific undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of day's notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Portfolio may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 (the "1933 Act"),
including restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act. However, a Portfolio
will not invest more than 10% of the value of its net assets in securities which
are illiquid, which includes fixed time deposits and repurchase agreements
maturing in more than seven days that cannot be traded on a secondary market and
restricted securities, unless, in the case of restricted securities, the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the
11
<PAGE>
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 repayment
of the notes. Tax-exempt commercial paper consists of short-term unsecured
promissory notes issued by a state or local government or an authority or agency
thereof. The Portfolios which invest in municipal obligations may also acquire
securities in the form of custodial receipts which evidence ownership of future
interest payments, principal payments or both on certain state and local
governmental and authority obligations when, in the opinion of bond counsel,
interest payments with respect to such custodial receipts are excluded from
gross income for federal income tax purposes, and in the case of the Tax-Exempt
California and Tax-Exempt New York Portfolios, exempt from California and New
York (city and state) personal income taxes, respectively. Such obligations are
held in custody by a bank on behalf of the holders of the receipts. These
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custodial receipts are known by various names, including "Municipal Receipts"
("MRs") and "Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-
CATS"). There are a number of other types of notes issued for different
purposes and secured differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital
needs and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security
including partially or fully insured, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. In
addition to a debt service reserve fund, some authorities provide further
security in the form of a state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Lease rental revenue bonds
issued by a state or local authority for capital projects are secured by annual
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations.
Private activity bonds (a term that includes certain types of bonds
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
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Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Portfolios may purchase are limited to short-
term serial bonds---those with original or remaining maturities of thirteen
months or less. The Portfolios may purchase long-term bonds provided that they
have a remaining maturity of thirteen months or less or, in the case of bonds
called for redemption, the date on which the redemption payment must be made is
within thirteen months. The Portfolios may also purchase long-term bonds
(sometimes referred to as "Put Bonds"), which are subject to a Portfolio's
commitment to put the bond back to the issuer at par at a designated time within
thirteen months and the issuer's commitment to so purchase the bond at such
price and time.
The Portfolios which invest in municipal obligations may invest in
tender option bonds. A tender option bond is a municipal obligation (generally
held pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults by, or a significant downgrading in the
credit rating assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a
Portfolio. The liquidity of a tender option bond is a function of the credit
quality of both the bond issuer and the financial institution providing
liquidity. Consequently, tender option bonds are deemed to be liquid unless, in
the opinion of the Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Portfolio's credit
quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios intend to invest in tender option bonds the interest
on which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such
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tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. A similar risk exists for certain other investments
subject to puts or similar rights. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the proper
tax treatment of tender options and the associated fees, in relation to various
regulated investment company tax provisions is unclear. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intend to
manage their respective portfolios in a manner designed to eliminate or minimize
any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New
York Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obligations, including
risks relating to future political and economic developments, nationalization,
foreign governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Portfolios, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Portfolios. Thus,
the issue may not be said to be publicly offered. Unlike securities which must
be registered under the Securities Act of 1933 prior to offer and sale,
municipal obligations which are not publicly offered may nevertheless be readily
marketable.
Municipal obligations purchased for a Portfolio may be subject to the
Portfolio's policy on holdings of illiquid securities. The Adviser determines
whether a municipal obligation is liquid based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The Adviser believes that the quality standards applicable to each Portfolio's
investments enhance liquidity. In addition, stand-by commitments and demand
obligations also enhance liquidity.
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Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
INVESTING IN CALIFORNIA
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the Tax-Exempt
California Portfolio. The following section provides only a brief summary of
the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
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states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32.6
million represents over 12% of the total United States population and grew by
27% in the
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1980s. While California's substantial population growth during the 1980's
stimulated local economic growth and diversification and sustained a real estate
boom between 1984 and 1990, it increased strains on California's limited water
resources and demands for government services. Population growth slowed since
1991 even while substantial immigration has continued, due to a significant
increase in outmigration by California residents. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
were in Southern California, led by declines in the aerospace and construction
industries. Significantly related to cuts in lost federal defense spending.
Since the start of 1994, the California economy has been in a steady
recovery in all parts of the State. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing, wholesale
and retail trade, electronics, exports, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels were reached in 1996. Unemployment in California is down more than three
percent from its 10% peak in January, 1994, but still remains higher than the
national average rate.
Constitutional Limitations on Taxes, Other Changes and Appropriations
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Limitations on Property Taxes. Certain California Instruments may
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be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
power of California local governments and districts is limited by Article XIIIA
of the California constitution, also known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem taxes above the
1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
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Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires voters of
any governmental unit to give two-thirds approval to levy any "special tax".
Court decisions, however, allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
--------------------------------------------
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
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In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters, (2)
appropriations arising from certain emergencies declared by the Governor, (3)
appropriations for certain capital outlay projects, (4) appropriations by the
State of post 1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions. The State
must refund 50% paid to schools and community colleges. With more liberal
annual adjustment factors since 1988, and depressed revenues since 1990 because
of the recession, few governments, including the State, are currently operating
near
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their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations more than $7 billion under
the Article XIIIB limit. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies of their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these articles on California Instruments. It is not presently
possible to predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of these articles, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on
----------
outstanding general obligation bonds is the second charge to the General Fund
after support of the public school system and public institutions of higher
education. Total outstanding general obligation bonds and lease purchase debt
of California increased from $9.4 billion at June 30, 1987 to $23.8 billion at
March 1, 1997. The State also had outstanding at March 1, 1997 $358 million of
general obligation commercial paper notes which will be refunded into long-term
bonds at a later date. In FY1995-96, debt service on general obligation bonds
and lease purchase debt was approximately 5.2% of General Fund revenues. State
voters approved $6.4 billion of new general obligation bond authorizations on
the 1996 ballots.
Recent Financial Results. The principal sources of General Fund
------------------------
revenues in 1995-1996 were the California personal income tax (45% of total
revenues), the sales tax (34%), bank and corporation taxes (13%), and the gross
premium tax on insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "SFEV"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund.
General. Throughout the 1980s, California state spending increased
-------
rapidly as California's population and economy also grew rapidly, including
increased spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Beginning at the start of the 1990-91 Fiscal Year, California faced
adverse economic, fiscal and budget conditions. The economic
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recession seriously affected California's tax revenues. It also caused
increased expenditures for health and welfare programs. Even though the economy
is recovering, California is still facing a structural imbalance in its budget
with the largest programs supported by the General Fund (education, health,
welfare and corrections) growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. These structural concerns will
be exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the
--------------
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Fiscal Years 1991-92 to 1995-96, including the following (not all of
these actions were taken each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in mandates on local
government;
. transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs,
coupled with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal
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Year, the accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, to carry the final retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results. While General Fund revenues and
expenditures were essentially equal in FY 1992-93 (following two years of excess
expenditures over revenues), the General Fund had positive operating results in
FY 1993-94 and 1995-96, which reduced the accumulated budget deficit to less
than $100 million as of June 30, 1996. The State Department of Finance estimated
that the General Fund received revenues of about $46.3 billion in FY 1995-96,
more than $2 billion higher than was originally expected, as a result of the
strengthening economy. Expenditures totaled about $45.4 billion, also about $2
billion higher than budgeted, because, among other factors, the State
Constitution requires disbursement of a percentage of revenues to local school
districts and federal actions to reduce welfare costs and to pay for costs of
illegal immigrants were not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring
1992 until 1995, the State had to rely on issuance of short-term notes which
matured in a subsequent fiscal year to finance its ongoing deficit and pay
current obligations. With the repayment of the last of these deficit notes in
April, 1996, the State does not plan to rely further on external borrowing
across fiscal years, but will continue its normal cash flow borrowing during a
fiscal year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on
--------------
July 15, 1996, along with various implementing bills. The Legislature rejected
the Governor's proposed 15% cut in personal income taxes (to be phased over
three years), but did approve a 5% cut in bank and corporation taxes, to be
effective for
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income years starting on January 1, 1997. As a result, revenues for the Fiscal
Year are estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by
$1.65 billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class-size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts required federal law changes (including welfare reform, which was
enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California
and the California State University system, with no increases in student fees
for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed,
that, on June 30, 1997, the State's available internal borrowable (cash)
resources will be $2.9 billion, after payment of all obligations due by that
date, so that no external cross-fiscal year borrowing will be needed. The State
will continue to rely on
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internal borrowing and intra-year external note borrowing to meet its cash flow
requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $800 million above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal
welfare reform law will impact the State's finances, or those of its local
agencies; the State is in the midst of making many decisions concerning
implementation of the new welfare law.
Proposed 1997-98 Budget On January 9, 1997, the Governor released his
-----------------------
proposed budget for FY 1997-98. Assuming continuing strength in the economy,
the Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce
class size in lower primary grades, using excess revenues from FY 1996-97. He
also proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to
the State government, the State's budget continues to be under stress from
mandated spending on education, a rising prison population, and social needs of
a growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.
Bond Ratings. The ratings on California's long-term general
------------
obligation bonds were reduced in the early 1990's from "AAA" levels which had
existed prior to the recession. In 1996, Fitch and Standard & Poor's raised
their ratings of California's general obligation bonds, which are currently
assigned ratings of "A+" from Standard & Poor's, "A1" from Moody's and "A+" from
Fitch. There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal
------------------
proceedings (described in California's recent financial statements) that, if
decided against California, may require California to make
24
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significant future expenditures or may substantially impair revenues. Courts
have recently entered decisions which could overturn several parts of the
state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System, reductions in welfare payments and the use of certain cigarette tax
funds for health costs. All of these cases are subject to further proceedings
and appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year.
Obligations of Other Issuers
----------------------------
Other Issuers of California Instruments. There are a number of state
---------------------------------------
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the credit
quality of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State of
California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of counties have
indicated that their budgetary condition is extremely serious. In the 1995-96
and 1996-97 fiscal years, Los Angeles County, the largest in the State, had to
make significant cuts in services and personnel, particularly in the health care
system in order to
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balance its budget. The County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange County, which recently emerged from federal bankruptcy
protection, has substantially reduced services and personnel in order to live
within much reduced means.
Counties and cities may face further budgetary pressures as a result
of changes in welfare and public assistance programs, which will have to be
enacted by June, 1997 in order to comply with the federal welfare reform law.
It is now yet known how the State's legislation will turn out and what its
overall impact will be on local government finances.
Assessment Bonds. California Instruments which are assessment bonds
----------------
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long-Term Lease Obligations. Certain California long-term
--------------------------------------
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain funds to
cover operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a state receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State of California was a named defendant
(on the grounds that it controlled the District's finances). One of the
defenses raised in answer to this lawsuit
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was the invalidity of the District's lease. The trial court upheld the validity
of the lease, and the case was subsequently settled. Any ultimate judgment in
any future case against the position taken by the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
Other Considerations
--------------------
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in state regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California Instruments in which the California
Portfolio may invest, future allocations of state revenues to local governments
or the abilities of state or local governments to pay the interest on, or repay
the principal of, such California Instruments.
27
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Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the Tax-Exempt California Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the federal or state government to
appropriate sufficient funds within their respective budget limitations.
INVESTING IN NEW YORK
- ---------------------
Some of the significant financial considerations relating to the Tax-
Exempt New York Portfolio's investments in New York Instruments are summarized
below. This summary information is not intended to be a complete description
and is principally derived from official statements relating to issues of New
York Instruments that were available prior to the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in those official statements have not been independently verified.
STATE ECONOMY. New York is the third most populous state in the nation and has
- -------------
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
State per capita income for 1994 was estimated at $25,999, which was 19.2% above
the 1994 estimated
28
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national average of $21,809. Between 1975 and 1990 total employment grew by
21.3 percent while the labor force grew only by 15.7 percent. During this
period, unemployment fell from 9.5 percent to 5.2 percent of the labor force.
In 1991 and 1992, however, total employment in the State fell by 5.5 percent.
As a result, the unemployment rate rose to 8.5 percent reflecting a recession
that has had a particularly strong impact on the entire Northeast. Calendar
years 1993 and 1994 saw only a partial recovery.
STATE BUDGET. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it.
The Governor's Executive Budget projected balance on a cash basis in
the General Portfolio. It reflected a continuing strategy of substantially
reduced State spending, including program restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives.
On March 15, 1996, the Governor presented amendments to the 1996-97
Executive Budget to provide for balancing the 1996-97 state financial plan if
the federal government failed to adopt entitlement changes assumed to produce
savings in the State's 1996-97 Executive Budget.
The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").
The 1996-97 State Financial Plan was projected to be balanced on a
cash basis. As compared to the Governor's proposed budget as revised on March
20, 1996, the 1996-97 State Financial Plan increases General Portfolio spending
by $842 million, primarily from funding increased for education, special
education and higher education ($563 million). The balance represented funding
increases
29
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to a variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected for
1996-97 based on higher-than-projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new State tax amnesty
program, and other resources including certain non-recurring resources.
The State issued its first update to the 1996-97 State Financial Plan
(the "Mid-Year Update") on October 25, 1996. Revisions have been made to
estimates of both receipts and disbursements based on: (1) updated economic
forecasts for both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflected a
balanced 1996-97 State Financial Plan, with a reserve for contingencies in the
General Portfolio of $300 million. This reserve will be utilized to help offset
a variety of potential risks and other unexpected contingencies that the State
may face during the balance of the 1996-97 fiscal year.
Although revisions to the 1996-97 State Financial Plan contained in
the Mid-Year Update are favorable, the State faces certain risks which could
potentially cost the State up to one-half billion dollars. The Division of the
Budget believes these risks are balanced by reserves in the 1996-97 State
Financial Plan, including the $300 million reserve created in the Mid-Year
Update. However, there can be no assurance that these reserves will fully
offset litigation or other risks to the 1996-97 State Financial Plan.
One major uncertainty to the 1996-97 State Financial Plan continues to
be risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. An
additional risk to the 1996-97 State Financial Plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Similarly, certain litigation which by itself did not produce a
material judgment against the State could have an adverse impact on the 1996-97
State Financial Plan because of the precedential nature of the court's decision.
Specifically, the State Court of Appeals has denied a motion to appeal a lower
court decision in the so-called "GTE Spacenet" case, in which the court ruled
that GTE Spacenet was not subject to the 3.5 percent tax on gross receipts
imposed under section 186-a of the tax law. The court decision is limited to
provisions of section 186-a as it existed prior to the 1995 amendments, and has
little prospective effect. While this litigation in and of itself carries only
a small judgment in favor of GTE Spacenet and similar companies, the
consequences of the ruling could eventually entail refunds to other taxpayers of
several hundred million dollars. Refund claims of over
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<PAGE>
$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 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
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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.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the 1996-97 State
Financial Plan is based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. The Division of
Budget believes that its projections of receipts and disbursements relating to
the current State Financial Plan, and the assumptions on which they are based,
are reasonable. Actual results, however, could differ materially and adversely
from the projections set forth therein, and those projections may be changed
materially and adversely from time to time. There are also risks and
uncertainties concerning the future-year impact of actions taken in the 1996-97
budget.
In the State's 1997 fiscal year and in certain recent fiscal years,
the State has failed to enact a budget prior to the beginning of the State's
fiscal year.
RECENT FINANCIAL RESULTS. The General Portfolio is the principal operating
- ------------------------
Portfolio of the State and is used to account for all financial transactions,
except those required to be accounted for in another Portfolio. It is the
State's largest Portfolio and receives almost all State taxes and other
resources not dedicated to particular purposes.
The General Portfolio is projected to be balanced on a cash basis for
the 1996-97 fiscal year. Total receipts and transfers from other Portfolios are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Portfolio disbursements and transfers to other
Portfolios are projected to be $33.12 billion, an increase of $444 million from
the total in the prior fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased
by $173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental Portfolios of $1.666 billion, reflecting
liabilities of $14.778 billion and assets of $13.112 billion.
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DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal
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borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that the State is
able to meet its cash flow needs in the first quarter of the fiscal year without
relying on short-term seasonal borrowings.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State Portfolios dedicated for transportation purposes), and
not by the full faith and credit of the State. In addition, the proposed
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The
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<PAGE>
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
- ----------
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (5)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (6) challenges by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; and (10) an action seeking
reimbursement from the State for certain costs arising out of the provision of
pre-school services and programs for children with handicapped conditions.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided
35
<PAGE>
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 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
- -----------
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations,
36
<PAGE>
particularly with respect to debt that is State-supported or State-related. As
of September 30, 1995, date of the latest data available, there were 17
Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 17 Authorities was $73.45
billion.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State Portfolios.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State of New York
- ----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 2,
1993, S&P reconfirmed its A-rating of City bonds, continued its negative rating
outlook assessment and stated that maintenance of such rating depended upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On July 10, 1995, S&P
downgraded its rating on the City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. S&P stated that New York City's
reliance on one-time revenue measures to close annual budget gaps,
37
<PAGE>
a dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the City's continued high debt levels
also contributed to its decision to lower the rating. Moody's currently has the
City's rating under review for a possible downgrade.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
proceeds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do
not constitute an enforceable obligation or debt of either the State or the
City. As of December 31, 1995, MAC had outstanding an aggregate of
approximately $4.684 billion of its bonds. MAC is authorized to issue bonds and
notes to refunds its outstanding bonds and notes and to fund certain reserves,
without limitation as to principal amount, and to finance certain capital
commitments to the Transit Authority and the New York City School Construction
Authority for the 1992 through 1997 fiscal years in the event the City fails to
provide such financing.
The City and MAC have reached an agreement in principle under which
MAC will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal
38
<PAGE>
years covering the City and certain agencies showing balanced budgets determined
in accordance with GAAP. New York State also established the Office of the
State Deputy Comptroller for New York City ("OSDC") to assist the Control Board
in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period.
This means that the Control Board's powers of approval are suspended, but the
Board continues to have oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the City
Financial Plan reflected a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the federal share of Medicaid costs otherwise paid by the City. This strategy
has been the subject of substantial debate, and implementation of this strategy
will be significantly affected by State and federal budget proposals currently
being considered. It is likely that the City Financial Plan will be changed
significantly in connection with the preparation of the Executive Budget for the
1997 fiscal year as a result of the status of State and federal budget proposals
and other factors.
The City Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999
fiscal years, respectively, assuming successful implementation of the gap-
closing program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal
years included: (i) additional agency actions, totaling between $643 million
and $691 million in each of the 1997 through
39
<PAGE>
1999 fiscal years; (ii) additional savings resulting from State and federal aid
and cost containment in entitlement programs to reduce City expenditures and
increase revenues by $650 million in the 1997 fiscal year and by $727 million in
each of the 1998 and 1999 fiscal years; (iii) additional proposed federal aid of
$50 million in the 1997 fiscal year and State aid of $100 million in each of the
1997 through 1999 fiscal years; (iv) the receipt of $300 million in the 1997
fiscal year from privatization or other initiatives, certain of which actions is
expected to require legislative action by the City Council; and (v) the assumed
receipt of revenues relating to rent payments for the City's airports, totaling
$244 million, $226 million and $70 million in the 1997 through 1999 fiscal
years, respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
federal or State actions included in the federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for
40
<PAGE>
dealing with the large projected budget gap for the 1997 fiscal year.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the State's projections of its receipts and disbursements.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1994.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased
41
<PAGE>
expenditure requirements on affected localities. If New York State, New York
City or any of the Authorities were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within New York State
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions and long-
range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing New York State assistance in the
future.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios each may acquire the right
to sell a security to another party at a guaranteed price and date. Such a
right to resell may be referred to as a put, demand feature or "standby
commitment", depending on its characteristics. The aggregate price which a
Portfolio pays for securities with standby commitments may be higher than the
price which otherwise would be paid for the securities. Standby commitments may
not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic
or foreign banks supporting the other party's ability to purchase the security
from the Portfolio. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by the Portfolio. In considering whether a security meets a Portfolio's quality
standards, the Adviser will look to the creditworthiness of the party providing
the Portfolio with the right to sell.
The Portfolios value municipal obligations which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Portfolio's
net asset value. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the policy of each Portfolio that may enter into standby commitment transactions
is to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service
has issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt
42
<PAGE>
California Portfolio were series, has received a ruling from the Internal
Revenue Service to the effect that it is considered the owner of the municipal
obligations subject to standby commitments so that the interest on such
instruments will be tax-exempt income to it. The Internal Revenue Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or acquired or held with certain other types of put rights
and that its distributions of tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt for its unitholders. There is no
assurance that standby commitments will be available to a Portfolio nor has any
Portfolio assumed that such commitments will continue to be available under all
market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any
Portfolio without the approval of the majority of outstanding voting securities
of that Portfolio (which, under the Investment Company Act and the rules
thereunder and as used in the Prospectus and this Statement of Additional
Information, means the lesser of (1) 67% of the units of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding units of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding units of that Portfolio). Investment restrictions that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio, with the exception of borrowings
permitted by Investment Restriction (3).
Accordingly, the Trust may not, on behalf of any Portfolio:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company under the Investment Company Act of
1940, as amended ("the Act"). This restriction does not, however, apply to
any Portfolio classified as a non-diversified company under the Act.
(2) purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of action,
when
43
<PAGE>
otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, obligations (other than commercial paper)
issued or guaranteed by U.S. banks and U.S. branches of U.S. or foreign
banks and repurchase agreements and securities loans collateralized by such
U.S. Government obligations or such bank obligations. For the purposes of
this restriction, state and municipal governments and their agencies,
authorities and instrumentalities are not deemed to be industries;
telephone companies are considered to be a separate industry from water,
gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly
owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of their parents. Notwithstanding the foregoing, the ILA Money
Market Portfolio will invest more than 25% of the value of its total assets
in bank obligations (whether foreign or domestic) except that if adverse
economic conditions prevail in the banking industry the ILA Money Market
Portfolio may, for defensive purposes, temporarily invest less than 25% of
the value of its total assets in bank obligations.
(3) borrow money, except (a) that the Portfolio may borrow from banks
(as defined in the Act) or through reverse repurchase agreements in amounts
up to 33 1/3% of its total assets (including the amount borrowed), (b) the
Portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) the Portfolio may
purchase securities on margin to the extent permitted by applicable law.
(4) make loans, except (a) through the purchase of debt obligations in
accordance with each Portfolio's investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Portfolio may be deemed to be an
underwriting.
(6) purchase, hold or deal in real estate, although the Portfolio may
purchase and sell securities that are secured by real estate or interests
therein, securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by the Portfolio as a
result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial
44
<PAGE>
instruments and contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Portfolio may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objectives, restrictions and policies as the Portfolio.
As money market funds, the Portfolios must also comply with Rule 2a-7 under
the Investment Company Act. Amendments to Rule 2a-7 have been proposed and are
expected to be effective at some time in 1997. The following assumes that such
amendments are in effect as currently proposed. While a detailed and technical
Rule, Rule 2a-7 has three basic requirements: portfolio maturity, portfolio
quality and portfolio diversification. Portfolio maturity. Rule 2a-7 requires
that the maximum maturity of any security in a Portfolio's portfolio may not
exceed 397 days and a Portfolio's average portfolio maturity may not exceed 90
days. Portfolio quality. A money market fund may only invest in First Tier and
Second Tier securities (as defined in the Rule and the Prospectus). Each
Portfolio, other than the Tax-Exempt Portfolios, as a matter of non-fundamental
policy only invests in First Tier securities. Portfolio diversification. The
Prime Obligations, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Exempt Diversified Portfolios may not invest more
than 5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such Portfolios may, however, invest up to 25% of its total assets in
the First Tier Securities of a single issuer for a period of up to three
business days after the purchase thereof. Tax-Exempt New York and Tax-Exempt
California Portfolios, with respect to 75% of their respective total assets, may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee or
unconditional demand feature); provided that such funds may not invest more than
5% of their respective total assets in the securities of a single issuer unless
the securities are First Tier securities. Immediately after the acquisition of
any put (i.e., the right to sell the security within a specified period at a
price equal to its amortized cost), with respect to 75% of the assets of a
Portfolio, no more than 10% of the Portfolio's total assets may be invested in
securities issued by or subject to puts issued by the same issuer. In the case
of the Tax-Exempt Portfolios (which are the only Portfolios that invest in
Second Tier securities), immediately after the acquisition of a put that is a
Second Tier security, no more than 5% of the Tax-Exempt Portfolio's total assets
may be invested in securities or puts
45
<PAGE>
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 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 (June 1994 to April 1996);
Senior Vice President of Scott Paper
Company until June 1994; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of
the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-
1996); Co-Head of GSAM (since
December 1994).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John P. McNulty, 44 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner of Goldman Sachs (1990-1994 and
1995-1996); Co-Head of GSAM (since November
1995); Limited Partner of Goldman Sachs
(1994 to November 1995).
*Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of Josiah
Bryn Mawr, PA 19010 Macy, Jr. Foundation (since 1977);
Director of the Philadelphia Contributionship
(since 1985); Director of Amherst
College (since 1986); Director
of Dayton Hudson Corporation (since 1988);
Director of the Spencer Foundation (since 1993);
and member of PNC Advisory Board (since 1993).
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs
One New York Plaza (since 1994); Director and
New Yor, NY 10004 Vice President of Goldman Sachs Funds
Management, Inc. (from April 1990 to
November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One 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 of Ameritech (a telecommunications holding
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
company)(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co.
(a closed-end, management investment
company).
Richard P. Strubel, 57 Trustee Managing Director, Tandem
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).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996); President,
New York, NY 10004 MFS Retirement Services Inc.,
of Massachusetts Financial
Services(prior thereto).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, GSAM (since April
New York, NY 10004 1994); Assistant Treasurer,
Goldman Sachs Funds Management,
Inc. (since March 1993); Vice
President, Goldman Sachs (since
March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust
Company (November 1993 to July
1995); Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL 60606 Director, Shareholder Servicing
of GSAM (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder Servicing
Chicago, IL 60606 of GSAM (since November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder Ser-
Chicago, IL 60606 vicing of GSAM (since November 1989).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY 10004 Vice President and Assistant
General Counsel of Goldman Sachs (since June
1992); 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, GSAM (since November 1993);
Associate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since
March 1997); Associate of Shereff
Friedman, Hoffman & Goodman
(prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst,
85 Broad Street Secretary Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 to June
1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM
New York, NY 10004 (since 1988).
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (1995-1996);
Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst,
Prudential Insurance (1991-1993).
</TABLE>
49
<PAGE>
Each interested Trustee and officer holds comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or an affiliate
thereof is the investment adviser, administrator and/or distributor. As of
April 1, 1997, the Trustees and officers of the Trust as a group owned less than
1% of the outstanding units of beneficial interest of each of the Portfolios.
The Trust pays each of its Trustees, other than those who are "interested
persons" of Goldman Sachs a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
50
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Funds
Compensation Part of (including
from the Portfolios' the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $18,150 $0 $62,450
Ashok N. Bakhru $22,729 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $18,893 $0 $58,954
William H. Springer $18,893 $0 $58,954
Richard P. Strubel $18,893 $0 $58,954
</TABLE>
- --------------
* The Goldman Sachs Funds consisted of 29 mutual funds, including the nine
portfolios, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
51
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit certain
other expenses (excluding fees payable to Service Organizations, taxes,
interest, brokerage and litigation, indemnification and other extraordinary
expenses) of each Portfolio, on an annualized basis, to .06% of the average
daily net assets of the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios; and to .07% of the average daily
net assets of the Prime Obligations, Treasury Obligations, Government and Tax-
Exempt California Portfolios. The amount of such reductions or limits, if any,
are calculated monthly and are based on the cumulative difference between a
Portfolio's estimated annualized expense ratio and the expense limit for that
Portfolio. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed to waive a portion of its
advisory fee for the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios during the fiscal year ended
December 31, 1996.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the Portfolios'
custodian, fees and expenses of the Portfolios' transfer agent, filing fees for
the registration or qualification of Units under federal or state securities
laws, expenses of the organization of the Portfolios, taxes (including income
and excise taxes, if any), interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against,
the Portfolios for violation of any law, legal and auditing and tax fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of Goldman Sachs with respect to the
52
<PAGE>
Portfolios), expenses of preparing and setting in type prospectuses, statements
of additional information, proxy material, reports and notices, the printing and
distribution of the same to Unitholders and regulatory authorities, its
proportionate share of the compensation and expenses of its "non-interested"
Trustees, and extraordinary expenses incurred by the Portfolios.
The Advisory Agreement entered into on behalf of the Portfolios was
most recently approved by the Board of Trustees, including the"non-interested"
Trustees, on April 23, 1997 and by the unitholders of each Portfolio (other than
the Treasury Instruments and Tax-Exempt New York Portfolios) on April 19, 1990
and by the unitholders of the Treasury Instruments and Tax-Exempt New York
Portfolios on June 3, 1991. The Advisory Agreement will remain in effect until
June 30, 1998, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by a majority of the Trustees or by a
vote of a majority of the outstanding voting securities of the particular
Portfolio, as defined in the Investment Company Act, and, in either case, by a
majority of "non-interested" Trustees.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994 the amount of the advisory fee incurred by each Portfolio was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio $5,185,990 $6,728,074 $9,135,344
Money Market Portfolio 2,955,074 2,618,275 2,663,551
Treasury Obligations Portfolio 3,157,511 3,206,490 3,545,307
Treasury Instruments Portfolio 1,555,342 1,079,236 687,965
Government Portfolio 2,509,206 3,259,056 4,804,362
Federal Portfolio 5,426,430 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,850,742 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,410,751 1,030,447 867,058
Tax-Exempt New York Portfolio 266,835 234,853 150,735
</TABLE>
GSAM agreed not to impose a portion of its advisory fees for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994 with respect to
the Money Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-
Exempt New York Portfolios. Had such fees been imposed, the following
additional fees would have been incurred for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Money Market Portfolio $ 492,512 $ 436,325 $ 443,925
Treasury Instruments Portfolio 2,073,789 1,438,992 917,292
Federal Portfolio 4,069,823 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,540,297 1,518,129 1,749,116
Tax-Exempt New York Portfolio 92,366 109,464 123,050
</TABLE>
53
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Portfolio during various periods of 1996, 1995 and 1994 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, the following additional expenses would have
been incurred for such years:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $234,432 $347,317 $635,085
Money Market Portfolio 243,590 135,715 301,326
Treasury Obligations Portfolio 212,886 203,882 371,456
Treasury Instruments Portfolio 220,794 223,652 150,525
Government Portfolio 231,536 276,785 526,310
Federal Portfolio 452,463 302,153 326,417
Tax-Exempt Diversified Portfolio 24,367 239,829 217,296
Tax-Exempt California Portfolio 22,092 19,625 34,612
Tax-Exempt New York Portfolio 16,029 32,403 51,675
</TABLE>
The Advisory Agreement provides that GSAM shall not be liable to a
Portfolio for any error of judgment by GSAM or for any loss sustained by the
Portfolio except in the case of GSAM's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. Each Portfolio may use any name
derived from the name "Goldman Sachs" only so long as the Advisory Agreement
remains in effect. The Advisory Agreement also provides that it shall terminate
automatically if assigned and that it may be terminated with respect to any
particular Portfolio without penalty by vote of a majority of the Trustees or a
majority of the outstanding voting securities of that Portfolio on 60 days'
written notice to GSAM or by GSAM without penalty at any time on 90 days'
written notice to the Trust.
Under the Advisory Agreement, GSAM is also responsible for the
administration of each Portfolio's business affairs subject to the supervision
of the Trustees and, in connection therewith, furnishes each Portfolio with
office facilities and is responsible for ordinary clerical, recordkeeping and
bookkeeping functions, to the extent not provided pursuant to the Portfolios'
custodian agreements; preparation and filing of documents required to comply
with federal and state securities laws; supervising the activities of the
Portfolios' custodian and transfer agent; providing assistance in connection
with meetings of the Trustees and unitholders; and other administrative services
necessary to conduct the Trust's business.
In managing the Tax-Exempt Diversified Portfolio, the Tax-Exempt
California Portfolio and the Tax-Exempt New York Portfolio, GSAM will draw upon
the extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service
54
<PAGE>
costs, liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs retained approximately $300 of commissions on redemptions of Class B
shares during 1996. Goldman Sachs also serves as the Portfolios' transfer
agent. Goldman Sachs provides customary transfer agency services to the
Portfolios, including the handling of unitholder communications, the processing
of unitholder transactions, the maintenance of unitholder account records,
payment of dividends and distributions and related functions. For these
services, Goldman Sachs receives .04% (on an annualized basis) of the average
daily net assets with respect to each Portfolio (other than the Prime
Obligations Portfolio). With respect to the Prime Obligations Portfolio,
Goldman Sachs is entitled to receive a fee from the Portfolio equal to the
classes proportionate share of the total transfer agency fees borne by the
Portfolio, which are equal to $12,000 per year plus $7.50 per account, together
with out-of-pocket expenses (including those out of pocket expenses payable to
servicing agents) applicable to ILA Class B Units and .04% of the average daily
net assets of the other classes of the Prime Obligations Portfolio. Goldman
Sachs may from time to time agree that the fee it would otherwise be entitled to
receive under its transfer agency agreement will be reduced.
For the fiscal years ended December 31, 1996, December 31, 1995 and December 31,
1994 the Portfolios incurred transfer agency fees as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Prime Obligations Portfolio $ 592,685 $768,923 $1,044,039
Money Market Portfolio 394,010 349,060 355,140
Treasury Obligations Portfolio 360,858 366,456 405,178
Treasury Instruments Portfolio 414,758 287,798 183,457
Government Portfolio 286,766 372,463 549,070
Federal Portfolio 1,085,286 908,708 679,243
Tax-Exempt Diversified Portfolio 616,119 607,252 699,643
Tax-Exempt California Portfolio 161,229 117,765 99,092
Tax-Exempt New York Portfolio 41,051 39,298 32,139
</TABLE>
Goldman Sachs is one of the largest international investment banking
firms in the United States. Founded in 1869, Goldman Sachs is a major
investment banking and brokerage firm providing a broad range of financing and
investment services both in the United States and abroad. As of November 29,
1996, Goldman Sachs and its consolidated subsidiaries had assets of
approximately $152 billion and partners' capital of $5.2 billion. Goldman
Sachs became registered as an investment adviser in 1981. As of March 24, 1997,
Goldman Sachs, together with its affiliates, acted as investment
55
<PAGE>
adviser, administrator or distributor for approximately $104.9 billion in total
assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS
-----------------------------------------------------------------
MANAGED BY GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and
- ------------------------
their affiliates, in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Adviser and its advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Portfolios and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Portfolios. Goldman Sachs and its affiliates are major participants in the
global currency, equities, swap and fixed-income markets, in each case on a
proprietary basis and for the accounts of customers. As such, Goldman Sachs and
its affiliates are actively engaged in transactions in the same securities,
currencies, and instruments in which the Portfolios invest. Such activities
could affect the prices and availability of the securities, currencies, and
instruments in which the Portfolios invest, which could have an adverse impact
on each Portfolio's performance. Such transactions, particularly in respect of
proprietary accounts or customer accounts other than those included in the
Adviser's and its advisory affiliates' asset management activities, will be
executed independently of the Portfolios' transactions and thus at prices or
rates that may be more or less favorable. When the Adviser and its advisory
affiliates seek to purchase or sell the same assets for their managed accounts,
including the Portfolios, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
to be equitable. In some cases, this system may adversely affect the size or the
price of the assets purchased or sold for the Portfolios.
From time to time, the Portfolios' activities may be restricted
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. As a result, there may be periods, for example, when the Adviser,
and/or its affiliates, will not initiate or recommend certain types of
transactions in certain securities or instruments with respect to which, or in
securities of issuers for which, the Adviser and/or its affiliates are
performing services or when position limits have been reached.
In connection with their management of the Portfolios, the Adviser may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Adviser will not be under
any obligation, however, to effect transactions on behalf of the Portfolios in
accordance with such analysis and models. In addition, neither Goldman
Sachs
56
<PAGE>
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Portfolios and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Portfolios. The proprietary activities or portfolio strategies of Goldman Sachs
and its affiliates or the activities or strategies used for accounts managed by
them or other customer accounts could conflict with the transactions and
strategies employed by the Adviser in managing the Portfolios.
The results of each Portfolio's investment activities may differ
significantly from the results achieved by the Adviser and its affiliates for
their proprietary accounts or accounts (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 Portfolio. Moreover, it is possible that a Portfolio will sustain losses
during periods in which Goldman Sachs and its affiliates achieve significant
profits on their trading for proprietary or other accounts. The opposite result
is also possible.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Portfolio's
activities, but will not be involved in the day-to-day management of such
Portfolio. In such instances, those individuals may, as a result, obtain
information regarding the Portfolio's proposed investment activities which is
not generally available to the public. In addition, by virtue of their
affiliation with Goldman Sachs, any such member of an investment policy
committee will have direct or indirect interests in the activities of Goldman
Sachs and its affiliates in securities, currencies and investments similar to
those in which the Portfolio invests.
In addition, certain principals and certain of the employees of the
Adviser are also principals or employees of Goldman Sachs or its affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Adviser may enter into transactions and invest in instruments in
which customers of Goldman Sachs serve as the counterparty, principal or issuer.
In such cases, such party's interests in the transaction will be adverse to the
interests of the Portfolios, and such party may have no incentive to assure
that the Portfolios obtain the best possible prices or terms in connection with
the transactions. Goldman Sachs and its affiliates may also create, write or
issue derivative instruments for customers of Goldman Sachs or its affiliates,
the underlying securities currencies or instruments of which may be those in
which the Portfolios invest or which may be based on the performance of
57
<PAGE>
a Portfolio. The Portfolios may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Portfolios. At times, these activities may
cause departments of the Firm to give advice to clients that may cause these
clients to take actions adverse to the interest of the client. To the extent
affiliated transactions are permitted, the Portfolios will deal with Goldman
Sachs and its affiliates on an arm's-length basis.
Each Portfolio will be required to establish business relationships
with its counterparties based on the Portfolio's own credit standing. Neither
Goldman Sachs nor its affiliates will have any obligation to allow their credit
to be used in connection with a Portfolio's establishment of its business
relationships, nor is it expected that a Portfolio's counterparties will rely on
the credit of Goldman Sachs or any of its affiliates in evaluating the
Portfolio's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is
not required to, purchase and hold shares of a Portfolio in order to increase
the assets of the Portfolio. Increasing a Portfolio's assets may enhance
investment flexibility and diversification and may contribute to economies of
scale that tend to reduce a Portfolio's expense ratio. Goldman Sachs reserves
the right to redeem at any time some or all of the shares of a Portfolio
acquired for its own account. A large redemption of shares of a Portfolio by
Goldman Sachs could significantly reduce the asset size of the Portfolio, which
might have an adverse effect on a Portfolio's investment flexibility, portfolio
diversification and expense ratio. Goldman Sachs will consider the effect of
redemptions on a Portfolio and other unitholders in deciding whether to redeem
its units.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all
other accounts managed by GSAM for execution with many firms. GSAM uses its
best efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread
58
<PAGE>
or commission, if any. Securities purchased and sold by the Portfolios are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in
many types of municipal and money market instruments. Its activities in this
regard could have some effect on the markets for those instruments which the
Portfolios buy, hold or sell. An order has been granted by the SEC under the
Investment Company Act which permits the Portfolios to deal with Goldman Sachs
in transactions in certain taxable securities in which Goldman Sachs acts as
principal. As a result, the Portfolios may trade with Goldman Sachs as
principal subject to the terms and conditions of such exemption.
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in
view of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for
more than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a 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 Portfolio believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
59
<PAGE>
During the fiscal year ended December 31, 1996, the Trust acquired and
sold securities of its regular broker/dealers: Bear Stearns, Chase Manhattan,
Daiwa Securities, Lehman, Morgan Stanley, Smith Barney Inc., Swiss Bank Corp.
and Union Bank of Switzerland.
As of December 31, 1996, the Prime Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1 under the Investment Company Act, or their parents ($ in thousands):
Chase Manhattan ($57,038), Smith Barney ($30,000), Morgan Stanley ($58,323), and
Swiss Bank Corp. ($3,806).
As of December 31, 1996, the Money Market Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under the Investment Company Act, or their parents ($ in thousands): Bear
Stearns ($34,778), Morgan Stanley ($70,359), Chase Manhattan ($30,388), and
Swiss Bank Corp. ($13,730).
As of December 31, 1996, the Treasury Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1, or their parents ($ in thousands): Bear Stearns Companies ($35,000),
Daiwa Securities ($35,000), Lehman ($35,000), Smith Barney Inc. ($30,000), Union
Bank of Switzerland ($30,000), Chase Manhattan ($107,833), Morgan Stanley
($129,400), and Swiss Bank Corp. ($58,316).
As of December 31, 1996, the Government Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1,
or their parents ($ in thousands): Bear Stearns Companies ($30,000), Daiwa
Securities ($30,000), Lehman ($30,000), Morgan Stanley ($120,363), Chase
Manhattan ($100,303), and Swiss Bank Corp. ($54,244).
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, 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
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certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During such periods, the yield to an
investor in a Portfolio may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on units of a Portfolio may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he or she
purchased units of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Portfolio's price per unit as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Portfolio's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per unit based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
unitholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of units in kind; or establishing a net
asset value per unit by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per unit at $1.00 the
Trustees have the authority (1) to reduce or increase the number of units
outstanding on a pro rata basis, and (2) to offset each unitholder's pro rata
portion of the deviation between the net asset value per unit and $1.00 from the
unitholder's accrued dividend account or from future dividends. Each Portfolio
may hold cash for the purpose of stabilizing its net asset value per unit.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Portfolio's units.
In order to continue to use the amortized cost method of valuation for
each Portfolio's investments, the Portfolios must comply with Rule 2a-7. See
"Investment Restrictions."
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The proceeds received by each Portfolio for each issue or sale of its
units, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Portfolio and constitute the underlying assets of that Portfolio. The
underlying assets of each Portfolio will be segregated on the books of account,
and will be charged with the liabilities in respect to such Portfolio and with a
share of the general liabilities of the Trust. Expenses with respect to the
Portfolios are to be allocated in proportion to the net asset values of the
respective Portfolios except where allocations of direct expenses can otherwise
be fairly made. In addition, within each Portfolio, ILA Units, ILA
Administration Units, ILA Service Units and ILA Class B 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.
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
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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) to the 365th power/7] - 1
The Tax-Exempt Diversified, Tax-Exempt California, Tax-Exempt New
York, Federal and Treasury Instruments Portfolios may also advertise a tax-
equivalent yield which is computed by dividing that portion of a Portfolio's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, the return for a Portfolio will fluctuate
from time to time and does not provide a basis for determining future returns.
Return is a function of portfolio quality, composition, maturity and market
conditions as well as of the expenses allocated to each Portfolio. The return
of a Portfolio may not be comparable to other investment alternatives because of
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Portfolio
with respect to ILA Units, ILA Administration Units, ILA Service Units and ILA
Class B Units for the seven-day period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio:
ILA Units 5.12 5.25 N/A
ILA Administration Units 4.97 5.10 N/A
ILA Service Units 4.72 4.85 N/A
ILA Class B Units 4.12 4.25 N/A
Money Market Portfolio:
ILA Units 5.20 5.33 N/A
ILA Administration Units 5.05 5.18 N/A
ILA Service Units 4.80 4.93 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Treasury Obligations Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Treasury Instruments Portfolio:
ILA Units 4.84 4.95 N/A
ILA Administration Units 4.69 4.80 N/A
ILA Service Units 4.44 4.55 N/A
Government Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Federal Portfolio:
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Tax-Exempt Diversified Portfolio:
ILA Units 3.58 3.64 5.93
ILA Administration Units 3.43 3.49 5.68
ILA Service Units 3.18 3.24 5.26
Tax-Exempt California Portfolio***:
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.52 3.58 5.83
ILA Administration Units 3.37 3.43 5.58
ILA Service Units** 3.12 3.18 5.17
</TABLE>
- -------------------------
* 6.39%, 6.12% and 5.67% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.72%, 6.43% and 5.96%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking California State taxes into account.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations voluntarily agreed to by the Adviser. See
"The Adviser, Distributor and Transfer Agent." In the absence of such fee
reductions and expense limitations, the yield of each Portfolio for the same
period would have been as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio
ILA Units 5.10 5.23 N/A
ILA Administration Units 4.95 5.08 N/A
ILA Service Units 4.70 4.83 N/A
ILA Class B Units 4.10 4.23 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Money Market Portfolio
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Treasury Obligations Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Treasury Instruments Portfolio
ILA Units 4.62 4.73 N/A
ILA Administration Units 4.47 4.58 N/A
ILA Service Units 4.22 4.33 N/A
Government Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Federal Portfolio
ILA Units 4.99 5.11 N/A
ILA Administration Units 4.84 4.96 N/A
ILA Service Units 4.59 4.71 N/A
Tax-Exempt Diversified Portfolio
ILA Units 3.48 3.54 5.76
ILA Administration Units 3.33 3.39 5.51
ILA Service Units 3.08 3.14 5.10
Tax-Exempt California Portfolio***
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.42 3.48 5.66
ILA Administration Units 3.27 3.33 5.41
ILA Service Units** 3.02 3.08 5.00
</TABLE>
- ----------
* 6.21%, 5.94% and 5.48% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.53%, 6.24% and 5.77%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking the California State Taxes into
account.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, the California top
marginal State personal income tax rate of 9.30% is being assumed in addition to
the 39.6% federal tax rate, for a combined tax rate of 46.42%. With respect to
the Tax-Exempt New York Portfolio, the tax equivalent yields are being shown
under
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three scenarios. The first scenario assumes a federal marginal tax rate of
39.6%, the second scenario assumes a New York top marginal State personal income
tax rate of 6.85%, for a combined effective tax rate of 44.94%. The third
scenario assumes a New York City top marginal personal income tax rate of 4.46%
in addition to the above federal and New York State tax rates, for a combined
effective tax rate of 47.63%. The combined tax rates assume full deductibility
of state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or recommended by GSAM and/or
its affiliates, certain attributes or benefits to be derived from asset
allocation strategies and the Goldman Sachs mutual funds that may form a part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's current economic outlook and domestic and
international market views and recommend periodic tactical modifications to
current asset allocation strategies. Such advertisements and information may
include other material which highlight or summarize the services provided in
support of an asset allocation program.
From time to time any Portfolio may publish an indication of its past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Money, Morningstar Mutual Funds, Micropal, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
The Trust may also advertise information which has been provided to the NASD
for publication in regional and local newspapers. In addition, the Trust may
from time to time advertise a Portfolio's performance relative to certain
indices and benchmark investments, including (without limitation): inflation and
interest rates, certificates of deposit (CDs), money market deposit accounts
(MMDAs), checking accounts, savings accounts and repurchase agreements. The
Trust may also compare a Portfolio's performance with that of other mutual funds
with similar investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Portfolio's performance data will be based on historical results and is not
intended to indicate future performance. A Portfolio's performance will vary
based on market conditions, portfolio expenses, portfolio investments and other
factors.
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Return for a Portfolio will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield or return.
The Trust may also, at its discretion, from time to time make a list of a
Portfolio's holdings available to investors upon request. The Trust may from
time to time summarize the substance of discussions contained in shareholder
reports in advertisements and publish the Adviser's views as to markets, the
rationale for a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to unitholders.
TAX INFORMATION
Each Portfolio has qualified and has elected or intends to qualify and elect
to be treated and to qualify as a separate regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code").
Such qualification does not involve supervision of management or investment
practices or policies by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) derive at least 90% of its gross income for the taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock or securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the Portfolio's total gross assets is represented by
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to an amount not greater in value than 5% of the
value of the Portfolio's total assets and not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of the
Portfolio's total (gross) assets is invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or two or more issuers controlled by the Portfolio and engaged in
the same, similar or related trades or businesses. For purposes of these
requirements, participation interests will be treated as securities, and the
issuer will be identified on the basis of market risk and credit risk associated
with any particular interest. Certain payments received with respect to such
interests, such as commitment fees and certain facility fees, may not be treated
as income qualifying under the 90% test.
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Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing and other requirements, provided that the
Portfolio distributes at least 90% of its investment company taxable income
(generally, all of its net taxable income other than "net capital gain," which
is the excess of net long-term capital gain over net short-term capital loss)
for such year and, in the case of any Portfolio that earns tax-exempt interest,
at least 90% of the excess of the tax-exempt interest it earns over certain
disallowed deductions. A Portfolio will be subject to federal income tax at
regular corporate rates on any investment company taxable income or net capital
gain that it does not distribute for a taxable year. In order to avoid a non-
deductible 4% federal excise tax, each Portfolio must distribute (or be deemed
to have distributed) by December 31 of each calendar year at least 98% of its
taxable ordinary income for such year, at least 98% of the excess of its capital
gains over its capital losses (generally computed on the basis of the one-year
period ending on October 31 of such year), and all taxable ordinary income and
the excess of capital gains over capital losses for the previous year that were
not distributed in such year and on which the Portfolio paid no federal income
tax.
Dividends paid by a Portfolio from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of unitholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid by a
Portfolio from the excess of net long-term capital gain (if any) over net short-
term capital loss are taxable to unitholders as long-term capital gain,
regardless of the length of time the units of a Portfolio have been held by such
unitholders, and also will not qualify for the corporate dividends-received
deduction. A Portfolio's net realized capital gains for a taxable year are
computed by taking into account realized capital losses, including any capital
loss carryforward of that Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Dividends paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any
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<PAGE>
tax-exempt distributions attributable to interest on certain "private activity
bonds," if any, received by a Portfolio may constitute a tax preference items
and may give rise to, or increase liability under, the alternative minimum tax
for particular unitholders. In addition, tax-exempt distributions of the
Portfolios may be considered in computing the "adjusted current earnings"
preference item of their corporate unitholders in determining the corporate
alternative minimum tax. To the extent that the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios invest in certain short-
term instruments, including repurchase agreements, the interest on which is not
exempt from Federal income tax, or earn other taxable income any distributions
of income from such investments or other taxable income will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry units of the
Portfolio will generally not be deductible. The availability of tax-exempt
obligations and the value of the Portfolios may be affected by restrictive tax
legislation enacted in recent years.
In purchasing municipal obligations, the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios rely on opinions of nationally-
recognized bond counsel for each issue as to the excludability of interest on
such obligations from gross income for federal income tax purposes and, where
applicable, the tax-exempt nature of such interest under the personal income tax
laws of a particular state. These Portfolios do not undertake independent
investigations concerning the tax-exempt status of such obligations, nor do they
guarantee or represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in units or in cash. Unitholders
electing to receive distributions in the form of additional units will have a
cost basis in each unit so received equal to the amount of cash they would have
received had they elected to receive cash.
Certain Portfolios may be subject to foreign withholding taxes or other
foreign taxes with respect to their investments in certain securities of foreign
entities. These taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties in some cases, and each Portfolio intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although no Portfolio anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by a portfolio,
that a Portfolio could make an election under Code Section 853 to permit its
unitholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by that Portfolio in foreign
countries. In the event such an election is made, unitholders will be required
to include their pro rata share of such taxes in gross income and may be
entitled to claim a foreign tax credit or deduction with respect to such taxes,
subject to certain
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<PAGE>
limitations under the Code. Unitholders who are precluded from taking such
credits or deductions will nevertheless be taxed on their pro rata share of the
foreign taxes included in their gross income, unless they are otherwise exempt
from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt unitholders. Under
the backup withholding provisions of Code Section 3406, all such distributions
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt unitholders who fail to furnish the Portfolio with their
taxpayer identification number and with certain certifications required by the
Internal Revenue Service or if the Internal Revenue Service or a broker notifies
a Portfolio that the number furnished by the unitholder is incorrect or that the
unitholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from the Tax-
Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
will not be subject to backup withholding if the applicable Portfolio reasonably
estimates that at least 95% of its distributions will be exempt-interest
dividends. The Portfolios may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct, if applicable, or that the investor is an exempt
recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in units, will be reduced by
the amounts required to be withheld. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.
Redemptions (including exchanges) and other dispositions of units in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Portfolios successfully
maintain a constant net asset value per share, but a loss may be recognized to
the extent a CDSC is imposed on the redemption or exchange of ILA Class B Units.
All or a portion of such a loss may be disallowed under applicable code
provisions in certain circumstances. Unitholders should consult their own tax
advisors with reference to their circumstances to determine whether a
redemption, exchange, or other disposition of Portfolio Units is properly
treated as a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder who is required to file a
federal income tax return. The Portfolios will inform unitholders of the
federal income tax status of their distributions after the end of each calendar
year, including, in the case of the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, the amounts that qualify as
exempt-interest dividends and any portions of such amounts that constitute tax
preference items under the federal alternative minimum tax. Unitholders who
receive exempt-interest dividends and have not held their units of the
applicable Portfolio for its entire taxable year may have designated as tax-
exempt or as
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a tax preference item a percentage of their distributions which is not exactly
equal to a proportionate share of the amount of tax-exempt interest or tax
preference income earned during the period of their investment in such
Portfolio. Each unitholder should consult his or her own tax advisor to
determine the tax consequences of an investment in a Portfolio in the
unitholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Unitholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each unitholder who is not a U.S. person should consult his or
her tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of
units of a Portfolio, including the possibility that such a unitholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Portfolio and, if a current IRS Form W-8 or acceptable substitute is not
on file with the Portfolio, may be subject to backup withholding on certain
payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of a Portfolio
and its unitholders under such laws may differ from their treatment under
Federal income tax laws, and an investment in the Portfolios may have tax
consequences for unitholders that are different from those of a direct
investment in the Portfolios' securities. Unitholders should consult their own
tax advisers concerning these matters. For example, in such states or
localities it may be appropriate for unitholders to review with their tax
advisers the state income and, if applicable, intangible property tax
consequences of investments by the Portfolios in securities issued by the
particular state or the U.S. Government or its various agencies or
instrumentalities, because many states (i) exempt from personal income tax
distributions made by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or (ii) exempt from intangible property tax the value of the units of such
companies attributable to such obligations, subject to certain state-specific
requirements and/or limitations. See also the discussion below of these
applicable provisions in California and New York.
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Provided that the Portfolios qualify as regulated investment companies and
incur no federal income tax liability, the Portfolios may still be subject to
New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends 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
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as long-term capital loss to the extent of such long-term capital gains
distribution. Finally, any loss realized upon the redemption of units within
thirty days before or after the acquisition of other units of the same Portfolio
may be disallowed under the "wash sale" rules.
New York City and State Taxation. Individual unitholders who are residents
of New York State will be able to exclude for New York State income tax purposes
that portion of the exempt-interest dividends properly designated as such from
the Tax-Exempt New York Portfolio which is derived from interest on obligations
of New York State and its political subdivisions and obligations of Puerto Rico,
the U.S. Virgin Islands and Guam. Exempt- interest dividends may be properly
designated as such only if, as anticipated, at least 50% of the value of the
assets of the Portfolio are invested at the close of each quarter of its taxable
year in obligations of issuers the interest on which is excluded from gross
income for federal income tax purposes. Individual unitholders who are
residents of New York City will also be able to exclude such income for New York
City income tax purposes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Tax-Exempt New York Portfolio is
not deductible for New York State or New York City personal income tax purposes.
Long-term capital gains, if any, that are distributed by the Tax-Exempt New
York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents.
Unitholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
This discussion of the tax treatment of the Portfolio and its unitholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information.
ORGANIZATION AND CAPITALIZATION
The Portfolios were reorganized from series of a Massachusetts business Trust
as part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of units exists,
each class or series must be preferred over all other classes or series in
respect of assets specifically allocated to such class or series. The Trustees
also have authority to classify and reclassify any series of units into one or
more classes of units. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of up to three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have
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authorized a fourth 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 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
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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, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding units of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
When issued units are fully paid and non-assessable. In the event of
liquidation, unitholders are entitled to share pro rata in the net assets of the
applicable class of the relevant Portfolio available for distribution to such
unitholders. All units entitle their holders to one vote per unit, are freely
transferable and have no preemptive subscription or conversion rights.
The Trust is not required to hold annual meetings of unitholders and does not
intend to hold such meetings. In the event that a meeting of unitholders is
held, each unit of the Trust will be entitled, as determined by the Trustees,
either to one voter for each unit or to one vote for each dollar of net asset
value represented by such units on all matters presented to unitholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote separately
from each other. Unitholders of the Trust do not have cumulative voting rights
in the election of Trustees. Meetings of unitholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the units entitled to vote at
such meetings. The unitholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers
and agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of
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any series is held personally liable solely by reason of being or having been a
shareholder and not because of the shareholder's acts or omissions or for some
other reason, the shareholder or former shareholder (or heirs, executors,
administrators, legal representatives or general successors) shall be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust acting on behalf of any affected series, must, upon
request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment
thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series
or classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were
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Duquesne Capital Management, Inc., 2579 Washington Rd. Ste. 322, Pittsburgh, PA
15241-2563 (5.45%); Harris Trust & Savings Bank, 200 W. Monroe Street, 12th
Floor, Chicago, IL 60606-5509 (8.36%); United Missouri Bank of Kansas City, PO
Box 419692, Kansas City 64141-6692 (5.63%); and VF Corporation, 1047 North Park
Road, Wyomissing, PA 19610 (6.85%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were Bank of New York, 48 Wall
Street, New York, NY 10286 (20.40%) and Stone Street & Bridge Street Funds, 85
Broad Street, 4th Floor, New York, NY 10004-2434 (9.52%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (6.83%); Bankers Trust
Company, PO Box 897, Des Moines, IA 50304-0897 (5.98%); First National Bank of
Omaha, PO Box 3128, Omaha, NE 68103-0128 (15.24%; Firstar Bank Madison, N.A.,
PO Box 7900, Madison, WI 53707-7900 (8.18%) and National City Bank Kentucky,
4100 W. 150th Street, 3rd Floor N. Annex, Cleveland, OH 44135 (7.485%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (32.49%); Emerald
Partners, 237 Park Avenue Ste. 801, New York, NY 10017-3142 (5.18%); and Morgan
Stanley, 2 No. LaSalle Street, Ste. 500, Chicago, IL 60602 (7.48%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were American Exploration Co.,
1331 Lamar Street, Ste. 900, Houston, TX 77010-3027 (9.82%); Comerica Bank, PO
Box 55-519, Detroit, MI 48255-0499 (11.06%); Morgan Stanley, 2 No. LaSalle
Street, Ste. 500, Chicago, IL 60602 (7.86%); Northern Trust, 50 South LaSalle
Street, Chicago, IL 60675 (6.43%); State Street Bank & Trust Co., PO Box 1992,
Boston, MA 02105-1992 (6.55%); United Missouri Bank of Kansas City, PO Box
419692, Kansas City, MO 64141-6692 (5.19%); and Wells Fargo Bank, 26610 Agoura
Rd., Calabasas, CA 91302-1954 (7.00%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were Bank of New York, 48
Wall Street, New York, NY 10286 (20.62%); Marine Midland Bank, PO Box 4203,
Buffalo, NY 14240 (7.48%); Shames Trust Accounts, 57 Holly Place, Briarcliff,
NY 10510-2107 (9.01%) and Stephen Apkon & Lisa Hertz Apkon, 33 Ashland Ave.,
Pleasantville, NY 10570-2301 (8.36%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt California Portfolio were Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee & Reiko-
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Takahashi Joint Tenants, 26541 Taaffe Road, Los Altos, CA 94022-4313.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Federal Portfolio was Bank of New York, 48 Wall Street,
New York, NY 10286 (10.46%); and The Baupost Group, Inc., PO Box 389125,
Cambridge, MA 02238-9998 (5.95%).
As of April 1, 1997, the only holders of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee, Los Altos, CA 94022-4313 (5.45%).
UNITHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the unitholders of the Portfolios are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust unitholder liability exists
in many other states. As a result, to the extent that a Delaware business trust
or a unitholder is subject to the jurisdiction of courts of such other states,
the courts may not apply Delaware law and may thereby subject the Delaware
business trust unitholders to liability. To guard against this risk, the
Declaration of Trust contains express disclaimer of unitholder liability for
acts or obligations of a Portfolio. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
Portfolio or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Portfolio for all loss suffered by a unitholder as a result of
an obligation of the Portfolio. The Declaration of Trust also provides that a
Portfolio shall, upon request, assume the defense of any claim made against any
unitholder for any act or obligation of the Portfolio and satisfy any judgment
thereon. In view of the above, the risk of personal liability of unitholders is
remote.
In addition to the requirements set forth under the Declaration of Trust, the
Trust provides that unitholders may bring a derivative action on behalf of the
Trust only if the following conditions are met: (a) unitholders eligible to
bring such derivative action under Delaware law who hold at least 10% of the
outstanding units of the Portfolio, or 10% of the outstanding units of the class
to which such action relates, shall join in the request for the Trustees to
commence such action; and (b) the Trustees must be afforded a reasonable amount
of time to consider such unitholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain counsel or other advisers in
considering the merits of the request and shall require an undertaking by the
Unitholders making such request to
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reimburse the Portfolio for the expense of any such advisers in the event that
the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the Portfolios' assets. In that capacity, State Street maintains
the accounting records and calculates the daily net asset value per unit of the
Portfolios. Its mailing address is P.O. Box 1713, Boston, MA 02105. State
Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International Place,
Boston, MA 02110, have been selected as auditors of the Trust. In addition to
audit services, Arthur Andersen LLP prepares the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Portfolios, including the Statements of
Investments as of December 31, 1996, the Statements of Assets and Liabilities as
of December 31, 1996, the related Statements of Operations for the period then
ended, the Statements of Changes in Net Assets and the Financial Highlights for
the periods presented, the Notes to the Financial Statements, and the Report of
Independent Public Accountants, all of which are included in the 1996 Annual
Report to the unitholders, are attached hereto and incorporated by reference
into this Statement of Additional Information.
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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, the amount of the administration fees paid by each Portfolio
to Service Organizations was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Prime Obligations
Portfolio $ 65,534 $141,500 $262,293
Money Market Portfolio 316,155 223,420 265,715
Treasury Obligations
Portfolio 145,201 165,430 175,368
Treasury Instruments
Portfolio 145,441 110,355 57,915
Government Portfolio 63,048 94,196 206,144
Federal Portfolio 906,321 713,846 491,089
Tax-Exempt Diversified
Portfolio 73,660 103,673 146,224
Tax-Exempt California
Portfolio 262 600 1,938
Tax-Exempt New York
Portfolio 39,843 27,783 26,576
</TABLE>
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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 Administration 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 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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ILA Unitholder Letter/Annual Report
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Dear Unitholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Institutional Liquid
Assets (ILA) Portfolios in 1996. It has been another positive year for ILA in
which the Portfolios did well compared with their respective IBC Financial Data,
Inc. averages while adhering to their conservative investment guidelines.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) reported at 2.0% annualized. Growth was more
dramatic during the second quarter, as industrial activity and automobile and
home sales all showed significant improvement, pushing real GDP to 4.7%, its
highest rate in two years. That growth rate caused some to expect the Fed to
change direction and tighten before year-end. However, the economy subsequently
moderated significantly, with third-quarter annualized real GDP retreating to
2.1%, reflecting lackluster consumer spending and a widening U.S. trade deficit.
As 1996 drew to a close, moderate economic growth and contained inflation kept
the Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
portfolios' weighted average maturities and structures were equally important to
our strategy.
During the second and third quarters of 1996, we extended the ILA
Portfolios' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Portfolios closed the year with
neutral weighted average maturities.
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ILA Unitholder Letter/Annual Report (continued)
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Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for ILA Portfolios Institutional Units* as of December 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------
Weighted
Institutional SEC 7-Day SEC 7-Day 30-Day Average
Liquid Assets Current Effective Average Maturity
Portfolios Yield Yield Yield (days)
=========================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.12% 5.25% 5.10% 40
---------------------------------------------------------
Money Market 5.20% 5.33% 5.18% 43
---------------------------------------------------------
Government 5.19% 5.32% 5.07% 31
---------------------------------------------------------
Treasury
Obligations 5.19% 5.32% 5.06% 34
---------------------------------------------------------
Treasury
Instruments 4.84% 4.95% 4.98% 54
---------------------------------------------------------
Federal 5.15% 5.28% 5.12% 41
---------------------------------------------------------
Tax-Exempt
Diversified 3.58% 3.64% 3.30% 39
---------------------------------------------------------
Tax-Exempt
California 3.47% 3.53% 3.11% 34
---------------------------------------------------------
Tax-Exempt
New York 3.52% 3.58% 3.19% 34
---------------------------------------------------------
</TABLE>
* ILA offers three separate classes of units (Institutional, Administration and
Service), each of which is subject to different fees and expenses that affect
performance and entitle unitholders to different services. The Administration
units and the Service units offer financial institutions the opportunity to
receive a fee for providing administrative support services. The Administration
units pay 0.15% plus 0.10% from the adviser for a total of 0.25%. The Service
units pay 0.40% plus 0.10% from the adviser for a total of 0.50%. More complete
information, including management fees and expenses, is included in the ILA
Portfolios' prospectus or may be obtained by calling the Goldman Sachs Funds at
1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy
Economy and a Strong Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from
- --------------------------------------------------------------------------------
2
<PAGE>
the Orange County bankruptcy abated somewhat, although various forms of credit
enhancement remained popular, even among high-quality issuers. Reflecting the
strong national economy, many states and localities experienced positive
financial results, reducing their regular cash flow borrowings.
The Credit Picture Abroad: Europe Improved,
While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks. In Asia,
creditworthiness was fairly stable. The notable negative exception was the
Japanese financial sector, which remained under pressure from the ongoing
weakness of the real estate markets, sluggish economic growth and ongoing
deregulation. However, Japan's largest banks have strong fundamentals and will
continue to be important and dominant players in the global financial market.
Australian credit quality strengthened through improved macroeconomic balances,
which provided evidence that Australia's recent boom-and-bust cycles may be
over. The weakness of Asian exports did not affect creditworthiness directly;
exports should recover this year, and the scare could prompt salutary policy
adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market portfolios. The Goldman Sachs Credit Department, which has analysts based
in London, Tokyo, Frankfurt and New York, as well as extensive technological
assets and credit expertise, will continue to vigilantly monitor global
developments in 1997.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, ILA Portfolios will continue to be managed with
short-to-neutral average life targets and short, ddered structures to prepare
for higher rates ahead.
Extended Trading Hours Improve Service Further
On November 4, 1996, we extended the trading hours for the Institutional
Liquid Assets Federal and Treasury Instruments Portfolios to 3:00 p.m. EST. Many
clients have already taken advantage of this additional flexibility.
In closing, we thank you for your support and for making 1996 a successful
year for the ILA Portfolios. We are pleased that many of you have joined our
conference calls following each Federal Open Market Committee meeting throughout
the year. Our goal is to continue to provide you with competitive performance,
as well as a range of value-added services that reflect the breadth and depth of
Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
3
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Commercial Paper and Corporate Obligations--60.5%
Bank Holding Companies
BankAmerica Corp.
$50,000,000 5.27% 03/21/97 $ 49,421,764
Business Credit Institutions
General Electric Capital Corp.
20,000,000 5.30 03/26/97 19,752,667
30,000,000 5.44 04/03/97 29,582,933
JC Penney Funding Corp.
44,300,000 5.31 01/31/97 44,103,973
Chemicals
Bayer Corp.
25,000,000 5.33 03/13/97 24,737,201
Commercial Banks
CP Trust Certificates Series 1996
35,000,000 5.94/(a)/ 03/28/97 35,000,000
Life Insurance
Commonwealth Life Insurance Co.
55,000,000 6.11/(b)/ 05/08/97 55,000,000
Pacific Mutual Life Insurance Co.
25,000,000 5.52/(b)/ 02/28/97 25,000,000
Prudential Funding Corp.
40,000,000 5.42 01/29/97 39,831,378
Motor Vehicles and Equipment
Ford Motor Credit Corp.
20,000,000 5.50 01/28/97 19,917,500
Hertz Corporation
25,000,000 5.32 02/04/97 24,874,389
Personal Credit Institutions
Associates Corp.
50,000,000 5.32 01/29/97 49,793,111
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
20,000,000 5.43 01/29/97 19,915,533
Receivable/Asset Financings
Beta Finance Inc.
7,000,000 6.11 06/17/97 7,000,000
Delaware Funding Corp.
30,000,000 5.29 02/20/97 29,779,583
Enterprise Funding Corp.
10,062,000 5.33 01/21/97 10,032,205
9,103,000 5.33 01/23/97 9,073,350
International Lease Finance Corp.
9,000,000 5.29% 03/24/97 $ 8,891,555
30,000,000 5.32 04/04/97 29,587,700
New Center Asset Trust
10,000,000 5.52 01/28/97 9,958,600
10,000,000 5.37 04/04/97 9,861,275
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
40,000,000 5.30 02/13/97 39,746,778
10,000,000 5.34 03/12/97 9,896,167
C.S. First Boston, Inc.
15,000,000 5.33 01/22/97 14,953,363
Merrill Lynch & Co., Inc.
10,000,000 5.45 02/19/97 9,925,819
40,000,000 5.33 02/26/97 39,668,356
Morgan Stanley Group, Inc.
10,000,000 5.59 01/28/97 9,958,075
15,000,000 5.32 02/06/97 14,920,200
25,000,000 5.79/(a)/ 06/27/97 25,000,000
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $764,666,253
- -----------------------------------------------------------
Bank Notes--10.7%
Colorado National Bank
$25,000,000 5.59%/(b)/ 01/15/97 $ 24,999,810
FCC National Bank
15,000,000 5.70 05/22/97 14,982,722
20,000,000 6.00 06/02/97 20,000,808
Huntington National Bank
25,000,000 6.05 06/13/97 25,014,637
PNC Bank, N.A.
40,000,000 5.58/(b)/ 04/01/97 39,992,313
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
- -----------------------------------------------------------
Total Bank Notes $134,990,290
- -----------------------------------------------------------
U.S. Government Agency Obligations--1.6%
Federal National Mortgage Association
$20,400,000 5.36% 03/12/97 $ 20,187,386
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $ 20,187,386
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit--9.5%
Chase Manhattan Corp.
$ 10,000,000 5.75% 02/03/97 $ 10,000,000
40,000,000 5.42 03/12/97 40,000,000
First Alabama Bank
20,000,000 5.55 02/28/97 19,999,973
Mellon Bank, N.A.
40,000,000 5.35 02/19/97 40,000,000
Union Bank of California
10,000,000 5.58 02/28/97 10,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 119,999,973
- -----------------------------------------------------------
Repurchase Agreements--17.9%
C.S. First Boston Corp., dated 12/31/96, repurchase
price $50,465,000 (FNMA: $51,588,373, 6.12%-6.23%,
02/01/32-10/01/32)
$ 50,000,000 5.40% 03/03/97 $ 50,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $100,036,111 (U.S. Treasury Bond: $53,861,960,
11.25%, 02/15/15; FHLB Stripped Security:
$48,746,508, 06/23/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $25,213,750 (FNMA: $9,152,917, 7.50%,
04/01/26; FHLMC: $17,073,692, 7.50%, 11/01/26)
25,000,000 5.40 02/26/97 25,000,000
Smith Barney, Inc., dated 12/31/96, repurchase price
$30,257,450 (FHLMC: $31,328,053, 7.00%,
06/01/26-11/01/26)
30,000,000 5.42 02/26/97 30,000,000
Joint Repurchase Agreement Account
21,400,000 6.58 01/02/97 21,400,000
- -----------------------------------------------------------
Total Repurchase Agreements $ 226,400,000
- -----------------------------------------------------------
Total Investments $1,266,243,902/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Money Market Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--48.5%
Business Credit Institutions
General Electric Capital Corp.
$15,000,000 5.44% 04/03/97 $ 14,791,467
Commercial Banks
CP Trust Certificates Series 1996
20,000,000 5.68/(a)/ 03/28/97 20,000,000
Computer Software and Services
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
Banca Crt Financial Corp.
10,000,000 5.35 01/22/97 9,968,792
5,000,000 5.35 01/31/97 4,977,708
17,430,000 5.45 03/03/97 17,269,039
5,400,000 5.42 04/03/97 5,325,204
Generale Bank
15,000,000 5.35 04/10/97 14,779,313
San Paolo U.S. Finance Co.
25,000,000 5.36 01/31/97 24,888,333
15,000,000 5.33 02/13/97 14,904,504
Unifunding, Inc.
40,000,000 5.45 01/29/97 39,830,444
Home Builders
International Lease Finance Corp.
40,000,000 5.43 03/07/97 39,607,833
Life Insurance
Commonwealth Life Insurance Co.
25,000,000 5.64/(b)/ 05/08/97 25,000,000
Prudential Funding Corp.
10,000,000 5.42 01/29/97 9,957,844
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
25,000,000 5.35 03/25/97 24,691,631
Ford Motor Credit Co.
40,000,000 5.32 02/04/97 39,799,022
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
35,000,000 5.30 02/13/97 34,778,431
Merrill Lynch & Co., Inc.
40,000,000 5.35 02/11/97 39,756,278
Morgan Stanley Group, Inc.
20,000,000 5.32 02/06/97 19,893,600
20,000,000 5.53/(a)/ 06/27/97 20,000,000
Nomura Holdings
35,000,000 5.39 01/29/97 34,853,272
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $479,913,854
- -----------------------------------------------------------
Bank Notes--15.1%
Colorado National Bank
$15,000,000 5.59%/(b)/ 01/15/97 $ 14,999,886
Dakota Certificates of Standard Credit Card Master Trust
20,000,000 5.33/(b)/ 02/07/97 19,890,439
FCC National Bank, Wilmington
10,000,000 5.70 05/22/97 9,988,481
First Bank FSB
5,000,000 5.61/(b)/ 04/11/97 4,999,734
First National Bank of Maryland
5,000,000 5.60/(b)/ 09/30/97 4,998,547
Huntington National Bank
5,000,000 6.05 06/13/97 4,998,229
PNC Bank, N.A.
10,000,000 5.58/(b)/ 04/01/97 9,998,078
20,000,000 5.40/(b)/ 10/01/97 19,988,244
Society National Bank of Cleveland
25,000,000 5.58/(b)/ 05/14/97 24,990,309
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54/(b)/ 05/15/97 24,995,313
- -----------------------------------------------------------
Total Bank Notes $149,847,260
- -----------------------------------------------------------
Certificates of Deposit--0.5%
Chase Manhattan Corp.
$ 5,000,000 5.75% 02/03/97 $ 5,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 5,000,000
- -----------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$40,000,000 5.49% 03/18/97 $ 40,000,830
Sanwa Bank Ltd., London
35,000,000 5.46 03/21/97 35,000,377
- -----------------------------------------------------------
Total Certificates of Deposit - Foreign
Eurodollar $ 75,001,207
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ----------------------------------------------------------
ILA Money Market Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit - Yankeedollar--9.1%
Industrial Bank of Japan, New York
$35,000,000 5.46% 03/19/97 $ 35,000,368
Landesbank Hessen Thuer Gir, New York
30,000,000 6.03 06/13/97 30,036,531
Sumitomo Bank, Los Angeles
25,000,000 5.52 02/28/97 24,998,171
- -----------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 90,035,070
- -----------------------------------------------------------
Taxable Municipal Notes--2.9%
Florida Housing Finance Authority
$28,800,000 5.92%/(b)/ 01/01/34 $ 28,800,000
- -----------------------------------------------------------
Total Taxable Municipal Notes $ 28,800,000
- -----------------------------------------------------------
Time Deposit--3.6%
Bank of Tokyo, Mitsubishi Bank Ltd.
$35,000,000 5.50% 05/16/97 $ 35,000,000
- -----------------------------------------------------------
Total Time Deposit $ 35,000,000
- -----------------------------------------------------------
Repurchase Agreements--12.9%
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $50,018,056 (FHLMC: $52,044,149, 7.26%,
09/17/01)
$50,000,000 6.50% 01/02/97 $ 50,000,000
Joint Repurchase Agreement Account
77,200,000 6.58 01/02/97 77,200,000
- -----------------------------------------------------------
Total Repurchase Agreements $127,200,000
- -----------------------------------------------------------
Total Investments $990,797,391/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Government Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
U.S. Government Agency Obligations--31.2%
Federal Home Loan Bank
$ 25,000,000 5.35% 01/30/97 $ 24,892,257
50,000,000 5.40/(a)/ 04/04/97 49,988,154
25,000,000 5.45 11/12/97 24,977,221
10,000,000 5.42 12/02/97 9,986,619
25,000,000 5.50/(a)/ 12/26/97 24,979,592
Federal National Mortgage Association
30,000,000 6.50 01/02/97 29,994,583
15,000,000 4.72/(a)/ 01/27/97 14,999,007
20,000,000 5.41/(a)/ 09/29/97 19,992,616
7,500,000 5.53 10/29/97 7,497,075
50,000,000 5.40/(a)/ 12/03/97 49,968,600
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $257,275,724
- -----------------------------------------------------------
U.S. Treasury Obligations--3.0%
United States Treasury Notes
$ 20,000,000 5.63% 06/30/97 $ 19,965,941
5,000,000 6.00 09/02/97 4,999,214
- -----------------------------------------------------------
Total U.S. Treasury Obligations $ 24,965,155
- -----------------------------------------------------------
Repurchase Agreements--66.1%
Bear Stearns Companies, Inc. dated 12/31/96, repurchase
price $30,011,333 (FNMA: $30,894,721, 8.50%, 09/01/25)
$ 30,000,000 6.80% 01/02/97 $30,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase
price $30,403,125 (FHLM: $31,559,521, 7.00%, 11/01/26)
30,000,000 5.38 03/11/97 30,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$30,011,500 (U.S. Treasury Bill: $30,600,013, 11/13/97)
30,000,000 6.90 01/02/97 30,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$30,403,125 (FNMA: $30,964,228, 6.12%, 10/01/32)
30,000,000 5.38 03/11/97 30,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase
price $30,403,125 (FNMA: $31,531,603, 8.00%, 06/01/26)
30,000,000 5.38 03/12/97 30,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (U.S. Treasury Stripped
Security: $22,193,561, 11/15/99; U.S. Treasury
Notes: $8,408,442, 7.75%-8.88%, 2/15/00-2/15/01)
30,000,000 7.10 01/02/97 30,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (FNMA: $30,385,501, 5.28%,
06/01/24)
30,000,000 7.10 01/02/97 30,000,000
Repurchase Agreements (continued)
Nomura Securities International, Inc., dated 12/31/96,
repurchase price $30,012,500 (FHLM: $30,924,339,
6.50%-8.00%, 01/01/00-09/01/11)
$ 30,000,000 7.50% 01/02/97 $ 30,000,000
Joint Repurchase Agreement Account
305,000,000 6.58 01/02/97 305,000,000
- -----------------------------------------------------------
Total Repurchase Agreements $545,000,000
- -----------------------------------------------------------
Total Investments $827,240,870/(b)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/(b)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Treasury Obligations Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--9.6%
United States Treasury Notes
$40,000,000 5.63% 06/30/97 $39,932,792
27,500,000 5.38 12/01/97 27,459,792
10,000,000 5.25 12/31/97 9,975,384
- -----------------------------------------------------------
Total U.S. Treasury Obligations $77,367,968
- -----------------------------------------------------------
Repurchase Agreements--90.8%
Bear Stearns Companies Inc., dated 12/31/96, repurchase
price $35,013,125 (U.S. Treasury Note: $35,659,606,
8.75%, 8/15/00)
$35,000,000 6.75% 01/02/97 $35,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$30,399,750 (U.S. Treasury Note: $30,748,620, 7.50%,
11/15/01)
30,000,000 5.33 03/13/97 30,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase
price $35,013,028 (U.S. Treasury Bond: $35,702,267,
8.50%, 02/15/20)
35,000,000 6.70 01/02/97 35,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$35,013,417 (U.S. Treasury Bill: $35,700,492, 11/13/97)
35,000,000 6.90 01/02/97 35,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$35,012,833 (U.S. Treasury Note: $35,700,497, 7.25%,
02/15/98)
35,000,000 6.60 01/02/97 35,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $35,012,833 (U.S. Treasury Note: $35,838,260,
7.38%, 11/15/97)
35,000,000 6.60 01/02/97 35,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $35,013,806 (U.S. Treasury Stripped
Securities: $35,703,063, 02/15/00-11/15/00)
35,000,000 7.10 01/02/97 35,000,000
Merrill Lynch Government Securities, Inc., dated
12/31/96, repurchase price $35,012,542 (U.S. Treasury
Stripped Securities: $35,702,128, 02/15/02-02/15/26)
35,000,000 6.45 01/02/97 35,000,000
Nomura Securities International, Inc., dated 12/12/96,
repurchase price $30,400,500 (U.S. Treasury Notes:
$30,600,339, 5.13%-8.50%, 04/15/97-08/15/01)
30,000,000 5.34 03/12/97 30,000,000
Sanwa Securities, dated 12/31/96, repurchase price
$35,013,125 (U.S. Treasury Note: $36,039,356, 8.50%,
2/15/00)
35,000,000 6.75 01/02/97 35,000,000
Smith Barney Inc., dated 12/11/96, repurchase price
$30,400,500 (U.S. Treasury Notes: $28,942,094,
5.38%-6.88%, 05/15/97-07/31/99; U.S. Treasury Stripped
Security: $1,658,209, 02/15/00)
30,000,000 5.34 03/11/97 30,000,000
UBS Securities Inc., dated 12/31/96, repurchase price
$35,013,368 (U.S. Treasury Note: $35,676,249, 6.00%,
09/30/98)
35,000,000 6.88 01/02/97 35,000,000
Joint Repurchase Agreement Account
327,900,000 6.58 01/02/97 327,900,000
- -----------------------------------------------------------
Total Repurchase Agreements $732,900,000
- -----------------------------------------------------------
Total Investments $810,267,968/(a)/
===========================================================
</TABLE>
/(a)/The amount stated also represents aggregate cost for
federal income tax purposes.
Interest rates represent either the stated coupon rate,
annualized yield on date of purchase for discounted notes,
or, for floating rate securities, the current reset rate,
which is based upon current interest rate indices.
The percentages shown for each investment category reflect
the value of investments in that category as a percentage
of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Treasury Instruments Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Treasury Obligations--99.3%
United States Treasury Bills
$25,000,000 4.72% 01/30/97 $ 24,904,944
5,500,000 4.95 01/30/97 5,478,069
75,000,000 4.80 02/06/97 74,640,000
48,600,000 4.83 02/06/97 48,365,262
14,500,000 4.86 02/06/97 14,429,530
32,100,000 5.41 02/06/97 31,942,389
90,000,000 4.95 02/06/97 89,554,500
75,000,000 4.82 02/13/97 74,568,208
150,000,000 5.03 02/13/97 149,098,792
10,500,000 4.86 02/27/97 10,419,203
21,500,000 4.90 02/27/97 21,333,196
28,400,000 4.94 02/27/97 28,177,865
United States Treasury Notes
30,000,000 6.25 01/31/97 30,025,345
50,000,000 7.50 01/31/97 50,097,656
50,000,000 4.75 02/18/97 49,961,310
312,000,000 6.88 02/28/97 312,866,648
205,000,000 6.63 03/31/97 205,703,323
- ------------------------------------------------------------
Total U.S. Treasury Obligations $1,221,566,240
- ------------------------------------------------------------
Total Investments $1,221,566,240/(a)/
============================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Federal Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Government Agency Obligations--100.3%
Federal Farm Credit Bank
$ 20,515,000 5.36% 01/02/97 $ 20,511,946
37,635,000 5.58 01/06/97 37,605,833
2,400,000 5.58 01/07/97 2,397,767
27,300,000 5.26-5.27 01/13/97 27,252,072
36,345,000 5.35 01/15/97 36,269,382
56,000,000 5.37 01/21/97 55,832,933
42,000,000 5.37 01/23/97 41,862,170
9,750,000 5.50 01/27/97 9,711,271
11,490,000 5.48 01/31/97 11,437,529
212,210,000 5.23-5.41/(a)/ 02/03/97 212,075,061
44,895,000 5.21 02/04/97 44,674,092
24,000,000 5.33 02/06/97 23,872,080
20,545,000 5.21-5.33 02/10/97 20,424,201
10,000,000 5.20 02/14/97 9,936,444
79,055,000 5.21-5.39 02/18/97 78,494,540
14,830,000 5.22 02/21/97 14,720,332
50,635,000 5.21-5.33 02/26/97 50,216,604
17,000,000 5.21 02/27/97 16,859,764
16,000,000 5.21 02/28/97 15,865,698
51,610,000 5.22-5.32 03/03/97 51,423,313
8,000,000 5.32 03/10/97 7,919,609
7,180,000 5.21 03/11/97 7,108,302
50,000,000 5.48/(b)/ 03/11/97 49,992,224
6,200,000 5.21 03/12/97 6,137,191
20,000,000 5.36 03/25/97 19,752,844
19,000,000 5.32-5.36 03/26/97 18,762,747
9,000,000 5.32 03/27/97 8,886,950
11,000,000 5.32 03/31/97 10,855,325
17,000,000 5.30 04/01/97 16,774,750
50,000,000 5.52/(b)/ 05/21/97 49,981,445
50,000,000 5.84 06/18/97 49,958,175
10,000,000 5.37/(b)/ 06/26/97 9,996,868
50,000,000 5.49/(b)/ 08/26/97 49,972,764
50,000,000 5.36/(b)/ 10/02/97 49,959,775
Federal Home Loan Bank
5,100,000 5.22 01/02/97 5,099,261
50,000,000 5.38/(b)/ 01/03/97 49,999,747
17,895,000 5.24 01/16/97 17,855,929
34,900,000 5.23 01/23/97 34,788,562
25,000,000 5.28 01/28/97 24,901,000
133,300,000 5.22-5.35 01/30/97 132,733,719
25,130,000 5.28 01/31/97 25,019,533
181,845,000 5.21-5.32 02/13/97 180,701,332
28,750,000 5.21-5.26 02/14/97 28,566,649
145,815,000 5.20% 02/20/97 144,761,891
34,300,000 5.31 02/21/97 34,041,978
125,320,000 5.20-5.21 02/27/97 124,287,275
27,680,000 5.21 03/06/97 27,423,622
101,750,000 5.23 03/13/97 100,700,477
35,000,000 5.35 03/27/97 34,557,882
50,000,000 5.51/(b)/ 03/27/97 49,989,790
80,000,000 5.35 03/31/97 78,941,889
100,000,000 5.22/(b)/ 04/01/97 99,981,167
25,000,000 5.84 06/27/97 24,976,809
50,000,000 5.51/(b)/ 08/28/97 49,977,691
65,000,000 5.50/(b)/ 09/26/97 64,962,440
50,000,000 5.50/(b)/ 12/26/97 49,959,182
Student Loan Marketing Association
75,000,000 5.41 10/02/97 74,972,733
74,000,000 5.46 11/10/97 73,963,185
Tennessee Valley Authority
40,000,000 5.21 01/24/97 39,866,856
47,975,000 5.21 02/05/97 47,731,993
47,300,000 5.21 02/06/97 47,053,567
87,385,000 5.20-5.22 02/19/97 86,765,491
75,000,000 5.17 02/20/97 74,461,458
75,000,000 5.17 02/21/97 74,450,688
60,840,000 5.26-5.31 02/25/97 60,347,412
20,000,000 5.23 03/21/97 19,770,461
106,885,000 5.28 03/26/97 105,568,177
75,000,000 5.25 04/09/97 73,928,125
- ------------------------------------------------------------
Total Investments $3,300,609,972/(c)/
============================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio
December 31, 1996
- --------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
==============================================================
Alabama--6.4%
Columbia IDB PCRB Series 1996 A for Alabama Power Co.
(VMIG1)
$21,000,000 5.00% 01/01/97 $21,000,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 B
(A-1/VMIG1)/(c)/
23,500,000 5.00 01/01/97 23,500,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 C
(A-1/VMIG1)
4,600,000 4.65 01/01/97 4,600,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 E
(A-1/VMIG1)
4,900,000 5.10 01/01/97 4,900,000
Homewood RB for Samford University (Bank of Nova Scotia
LOC) (A-1+/VMIG1)
16,000,000 5.00 01/01/97 16,000,000
Jefferson County Sewer Revenue Warrants Series 1995 A
(Bayerische Landesbank Girozentrale LOC)(A-1+/P-1)
19,300,000 4.25 01/07/97 19,300,000
Mobile County IDA PCRB for M&T Chemicals (Bankers Trust
LOC) (A1)
3,000,000 4.13 01/01/97 3,000,000
Mobile IDA PCRB for Alabama Power Co. Series
1993A(A-1/VMIG1)
8,600,000 4.15 01/01/97 8,600,000
Mobile IDA PCRB for Alabama Power Co. Series
1994(A-1/VMIG1)
2,100,000 5.00 01/01/97 2,100,000
- -----------------------------------------------------------
$103,000,000
- -----------------------------------------------------------
Alaska--0.2%
Valdez Marine Terminal RB for Arco, Inc. Series 1994
C(A-1/P-1)
$ 2,600,000 3.60% 04/10/97 $ 2,600,000
- -----------------------------------------------------------
Arkansas--1.2%
Crossett PCRB for Georgia Pacific Corp. Series 1991
VRDN
(Suntrust Bank LOC)(A-1+/AA3)
$ 9,500,000 4.15% 01/07/97 $ 9,500,000
Union County PCRB Series 1988 for Great :Lakes Chemical
(A-1)
9,000,000 4.21/(b)/ 01/07/97 9,000,000
- -----------------------------------------------------------
$18,500,000
- -----------------------------------------------------------
California--5.8%
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
$ 6,000,000 3.47% 01/31/97 $ 6,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
12,000,000 4.00 01/07/97 12,000,000
California Statewide Communities Development Authority
Refunding RB Series 1995(A-1+)/(c)/
$ 9,300,000 3.90% 01/07/97 $ 9,300,000
California Statewide Communities Development Authority
Refunding RB Series 1995A-2(A-1+)
2,500,000 3.90 01/07/97 2,500,000
Los Angeles County MF Hsg. RB(A-1+)
3,500,000 2.80 01/07/97 3,500,000
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty
Trust Co./Westdeutsche Landesbank Girozentrale/Bank
of America/Union Bank of Switzerland
LOC)(SP-1/VMIG1)
12,450,000 4.50 06/30/97 12,492,536
Newport Beach VRDN RB Series 1996 A(A-1+)
600,000 5.15 01/01/97 600,000
State of California RANS Series 1996-97(SP-1+/VMIG1)
45,800,000 4.05 01/07/97 45,800,000
- -----------------------------------------------------------
$92,192,536
- -----------------------------------------------------------
Colorado--0.6%
State of Colorado General Fund TRANS Series 1996
A(SP-1+)
$10,000,000 4.50% 06/27/97 $10,033,630
- -----------------------------------------------------------
Connecticut--1.4%
State of Connecticut Development Authority
PCRB(Deutsche Bank LOC)(A-1+/VMIG1)
$17,400,000 4.15%/(b)/ 01/07/97 $17,400,000
State of Connecticut State 2nd Lien VRDN (Commerzbank
Bank LOC)(A-1+/VMIG1)
4,800,000 4.00 01/07/97 4,800,000
- -----------------------------------------------------------
$22,200,000
- -----------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES for Georgetown
University Series 1988 B, C and E (Bayerishe
Landesbank Girozentrale LOC)
(A-1+/VMIG1)
$10,900,000 4.10% 01/07/97 $10,900,000
HFA MF Hsg. for Mclean Gardens South Apartments VRDN
(Sumitomo Bank LOC)(VMIG1)
7,000,000 4.30 01/07/97 7,000,000
- -----------------------------------------------------------
$17,900,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Florida--2.8%
Dade County Water & Sewer VRDN Series 1994(A-1+/VMIG1)
$7,475,000 4.00%/(b)/ 01/07/97 $ 7,475,000
Florida Local Government Pooled CP Notes (First Union
National Bank of Florida LOC)(A-1+/P-1)
29,162,000 3.70 01/24/97 29,162,000
7,225,800 3.60 02/18/97 7,225,800
1,800,000 3.50 03/14/97 1,800,000
- -----------------------------------------------------------
$45,662,800
- -----------------------------------------------------------
Georgia--12.0%
Albany Dougherty PCRB for Philip Morris Co. (A-1/P-1)
$17,000,000 4.15% 01/07/97 $17,000,000
Albany Dougherty PCRB Series 1991 for Georgia Power
Co.(A-1+)
2,120,000 4.15 01/07/97 2,120,000
Burke County Development Authority RB(A-1+/VMIG1)
6,000,000 4.65 01/01/97 6,000,000
29,055,000 5.00 01/01/97 29,055,000
3,000,000 4.15 01/07/97 3,000,000
Burke County PCRB for Georgia Power Co.(A-1+/VMIG1)/(c)/
2,900,000 5.00 01/07/97 2,900,000
29,850,000 4.00/(b)/ 01/07/97 29,850,000
3,425,000 4.15 01/07/97 3,425,000
6,000,000 4.15 01/07/97 6,000,000
Burke County PCRB for Georgia Power Co. Series
1994(VMIG1)
3,400,000 5.00 01/07/97 3,400,000
Cobb County Institute of Nuclear Operations Inc. VRDN
for Georgia Power Co. (Suntrust Bank LOC)(Aa3)
4,295,000 4.15 01/07/97 4,295,000
Cobb County Power Operations Inc. VRDN (Trust Company
Bank LOC)(AA-)
2,330,000 4.15 01/07/97 2,330,000
Columbus Hospital Authority RB for St. Francis
Hospital(VMIG1)
7,750,000 4.15/(b)/ 01/01/97 7,750,000
DeKalb County IDA VRDN for Siemens Energy and
Automation, Inc.(P-1)
3,750,000 4.05 01/07/97 3,750,000
Dekalb Private Hospital Authority VRDN for Egleston
Children's Hospital Series 1994 A (Suntrust Bank
LOC)(VMIG1)
1,800,000 4.05 01/07/97 1,800,000
Floyd County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
5,080,000 5.00 01/07/97 5,080,000
Fulco Hospital Authority Revenue Anticipation
Certificates Series 1992 (Suntrust Bank LOC)(A-1+)
4,815,000 4.15% 01/07/97 4,815,000
Georgia Municipal Gas Authority RB(A-1/VMIG1)
22,200,000 4.00/(b)/ 01/07/97 22,200,000
Heard County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
1,800,000 5.00 01/01/97 1,800,000
Henry County IDA PCRB for Georgia Pacific Corp.
(Suntrust Bank LOC)(Aa3)
4,000,000 4.15 01/07/97 4,000,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1985 B and C (Credit
Suisse/Morgan Guaranty/Bayerische Landesbank
Girozentrale LOC)(A-1+/P-1)
12,650,000 3.55 03/06/97 12,650,000
8,145,000 3.55 03/11/97 8,145,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1994 C (Credit
Suisse/Morgan Guaranty/
Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
7,000,000 3.50 03/13/97 7,000,000
Savannah Economic Development Authority PCRB VRDN for
Savannah Electric & Power Co. (A-1/VMIG1)
4,085,000 4.15 01/07/97 4,085,000
- -----------------------------------------------------------
$192,450,000
- -----------------------------------------------------------
Hawaii--0.1%
Hawaii Housing Finance and Development Authority VRDN
(FHLB LOC)(A-1+)
$ 2,200,000 2.80% 01/07/97 $ 2,200,000
- -----------------------------------------------------------
Idaho--0.6%
Idaho Health Facilities for Holy Cross Health
Systems(A-1/VMIG1)
$10,000,000 4.10% 01/07/97 $10,000,000
- -----------------------------------------------------------
Illinois--3.2%
Belleville IDA for Weyerhaeuser Company Series
1993(A-1)
$ 1,800,000 4.21% 01/07/97 $ 1,800,000
Illinois Health Facilities Authority VRDN for Central
Dupage Hospital (Rabobank Nederland LOC)(VMIG1)
5,000,000 5.25 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for
Resurrection Healthcare(VMIG1)
15,000,000 5.00 01/01/97 15,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
Illinois (continued)
Illinois Health Facilities Authority VRDN Series 1985 D Revolving
Fund Pooled Finance Program (First National Bank of Chicago
LOC)(A-1/VMIG1)
$16,600,000 4.15% 01/07/97 $ 16,600,000
Illinois Health Facility Authority VRDN for Elmhurst Memorial
Hospital(VMIG1)
100,000 5.30 01/01/97 100,000
Sauget PCRB VRDN Series 1992(P-1)
3,300,000 4.20 01/07/97 3,300,000
Sauget PCRB VRDN Series 1993(P-1)
9,335,000 4.20 01/07/97 9,335,000
- -----------------------------------------------------------
$ 51,135,000
- -----------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN Series 1985 C and D (Bank of
America LOC)(VMIG1)
$ 1,180,000 4.15% 01/07/97 $ 1,180,000
Fort Wayne Parkview Memorial Hospital VRDN Series 1985
B, C & D (Fuji Bank LOC)(VMIG1)/(c)/
16,855,000 4.15 01/07/97 16,855,000
Gary CP Notes for U.S. Steel Corp. (Bank of New York LOC)
(A-1+/P-1)
20,000,000 3.55 03/11/97 20,000,000
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/VMIG1)
29,490,000 4.20 01/07/97 29,490,000
Jasper County PCRB for Nipsco Series 1994 A(A-1+/VMIG1)
5,200,000 5.10 01/01/97 5,200,000
Schererville Economic Development VRDN Series 1983 for Avery
International Corp. Project (Bankers Trust LOC)(Aa2)
4,000,000 4.13 01/07/97 4,000,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
5,000,000 4.15 01/07/97 5,000,000
- -----------------------------------------------------------
$ 81,725,000
- -----------------------------------------------------------
Iowa--1.4%
Muscatine County VRDN for Monsanto Corp.(P-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Salix PCRB VRDN for Midwest Power Systems Inc.(A-1/VMIG1)/(c)/
21,795,000 4.15 01/07/97 21,795,000
- -----------------------------------------------------------
$ 22,795,000
- -----------------------------------------------------------
Kentucky--1.7%
Calvert VRDN for Air Products and Chemicals Inc. Project(A-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Mason County Variable/Fixed Rate PCRB Pooled for East Kentucky
Power (CFC)(A-1+/Aa3)
13,450,000 4.15 01/07/97 13,450,000
Trimble County PCRB for Louisville Gas & Electric Series 1996 A(A-
1+/VMIG1)
12,500,000 3.50 03/14/97 12,500,000
- -----------------------------------------------------------
$ 26,950,000
- -----------------------------------------------------------
Louisiana--2.5%
Ascension Parish PCRB for BASF Wyandotte Corp. Series
1985 (Bank of Tokyo LOC)(P-1)
$ 2,600,000 5.10% 01/01/97 $ 2,600,000
Ascension Parish PCRB for Vulcan Materials Co. Series 1996(A-
1+/VMIG1)
8,200,000 4.20 01/07/97 8,200,000
Louisiana Public Facilities Authority School Health Care System
UPDATE Series 1993(A-1+/VMIG1)
7,700,000 3.60 01/08/97 7,700,000
Parish of Desoto PCRB Series 1991 A (Swiss Bank LOC)(A-1+/VMIG1)
4,600,000 4.05 01/07/97 4,600,000
Parish of Iberville VRDN for Air Products and Chemicals, Inc.
Project(A-1)
6,200,000 4.20 01/07/97 6,200,000
Plaquemines Port RB for Teco Energy, Inc. Series 1985 B(A-1+/P-1)
2,000,000 3.60 02/13/97 2,000,000
South Louisiana Port Commission RB for Occidental Petroleum Corp.
Series 1996 (Wachovia Bank LOC)(P-1)
4,400,000 4.15 01/07/97 4,400,000
West Baton Rouge Parish VRDN for Dow Chemical Co. Series 1991
(P-1)
4,000,000 3.55 02/10/97 4,000,000
- -----------------------------------------------------------
$ 39,700,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Maryland--0.9%
Baltimore County Consolidated Public Improvement BANS Series
1995(A-1+/P-1)
$10,000,000 3.55% 02/06/97 $ 10,000,000
Frederick GO VRDN (Fuji Bank LOC)(A-1/VMIG1)
4,800,000 4.25 01/07/97 4,800,000
- --------------------------------------------------------------------
$ 14,800,000
- --------------------------------------------------------------------
Massachusetts--1.6%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$11,000,000 3.75% 02/28/97 $ 11,008,115
Massachusetts Health & Education Authority RB for Harvard
University Series I(A-1+/VMIG1)/(c)/
13,866,000 3.90 01/07/97 13,866,000
- --------------------------------------------------------------------
$ 24,874,115
- --------------------------------------------------------------------
Michigan--0.7%
Michigan Job Development Authority for Mazda Motor Manufacturing
VRDN (Sumitomo Bank LOC)(VMIG1)
$11,100,000 4.25% 01/07/97 $ 11,100,000
- --------------------------------------------------------------------
Minnesota--1.5%
Becker PCRB for Northern States Power Co. Series 1992 A(A-1+)
$ 8,000,000 3.65% 01/16/97 $ 8,000,000
6,000,000 3.55 03/12/97 6,000,000
Becker PCRB for Northern States Power Co. Series 1993 A(A-1/VMIG1)
4,000,000 3.55 03/12/97 4,000,000
White Bear Lake IDA for Weyerhauser Co. Series 1993(A-1)
6,800,000 4.21 01/07/97 6,800,000
- --------------------------------------------------------------------
$ 24,800,000
- --------------------------------------------------------------------
Mississippi--0.6%
Canton IDR for Levi Strauss Co. (Bank of America LOC)(P-1)
$10,000,000 4.15%/(b)/ 01/07/97 $ 10,000,000
- --------------------------------------------------------------------
Missouri--1.8%
Belton RB (Texas Commerce Bank LOC)(P-1)
$ 4,025,000 4.25% 01/07/97 $ 4,025,000
Kansas City Cloversett IDA MF Hsg. RB Series 1988 VRDN (Boatmen's
Bank of Kansas City LOC)(A-1+)
8,720,000 4.30 01/07/97 8,720,000
Missouri Health & Education Facility Authority VRDN (MBIA)(AAA)
10,500,000 4.10 01/07/97 10,500,000
State Environmental Improvement and Energy Resources
Authority RB for Monsanto Corporation (P-1)
$ 5,520,000 4.20% 01/07/97 $ 5,520,000
- --------------------------------------------------------------------
$ 28,765,000
- --------------------------------------------------------------------
Montana--0.3%
Forsyth PCRB for Pacificorp. Series 1988 (Industrial Bank of Japan
LOC)(A-1/P-1)
$ 3,400,000 4.70% 01/01/97 $ 3,400,000
Montana State Board of Investments VRDN Payroll Tax Bonds(VMIG1)
1,000,000 4.00 01/07/97 1,000,000
- --------------------------------------------------------------------
$ 4,400,000
- --------------------------------------------------------------------
Nevada--0.2%
Clark County VRDN for Nevada Airport System (MBIA)
(A-1+/VMIG1)
$ 3,200,000 4.00% 01/07/97 $ 3,200,000
- --------------------------------------------------------------------
New Jersey--3.3%
New Jersey TRANS Series 1997 A(A-1+/P-1)
$48,000,000 3.50% 03/12/97 $ 48,000,000
New Jersey Turnpike Authority RB Series 1991 D (FGIC)(P-1)
5,600,000 3.75 01/07/97 5,600,000
- --------------------------------------------------------------------
$ 53,600,000
- --------------------------------------------------------------------
New Mexico--0.2%
Farmington PCRB for Arizona Public Service Series 1994 A (Union
Bank of Switzerland LOC)(A-1+/P-1)
$ 2,600,000 5.00% 01/01/97 $ 2,600,000
- --------------------------------------------------------------------
New York--12.1%
New York City GO VRDN Series 1993 B (FGIC)(A-1+/VMIG1)
$ 5,500,000 4.50% 01/01/97 $ 5,500,000
New York City GO (MBIA)(VMIG1)
19,800,000 4.15 01/07/97 19,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
60,000,000 4.50 04/15/97 60,137,770
New York City GO Series 1992 D (FGIC)
20,000,000 3.95 01/07/97 20,000,000
New York City GO Series 1994 (Union Bank of Switzerland
LOC)(A-1+/VMIG1)
2,200,000 4.50 01/01/97 2,200,000
New York City GO VRDN (Dai-Ichi Kangyo Bank LOC)(A-1/VMIG1)
2,600,000 4.50 01/01/97 2,600,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
New York (continued)
New York City GO VRDN (Norinchukin Bank LOC) (A-1+/VMIG1)
$ 7,000,000 4.50% 01/01/97 $ 7,000,000
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
8,900,000 3.50 03/12/97 8,900,000
New York City Municipal Water Finance Authority Series 3 (Toronto
Dominion Bank/Bank of Nova Scotia
LOC)(A-1+/P-1)
3,000,000 3.50 03/11/97 3,000,000
New York State Energy Research & Development Authority PCRB for
New York State Electric & Gas Series 1994 D (Union Bank of
Switzerland LOC)(A-1+/VMIG1)
8,700,000 4.40 01/01/97 8,700,000
New York State Housing Finance Agency for Normandie Court
Housing RB Series 1987 A (Fleet Bank LOC)(VMIG1)
900,000 4.00 01/07/97 900,000
New York State Local Government Assistance Series 1995 B VRDN
(Bank of Nova Scotia LOC)(A-1+/VMIG1)/(c)/
19,600,000 4.00 01/07/97 19,600,000
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
1,150,000 3.85 01/07/97 1,150,000
New York State Local Government VRDN Series 1995 F (Toronto
Dominion Bank LOC)(A-1+/VMIG1)/(c)/
15,000,000 4.00 01/07/97 15,000,000
New York State Triborough Bridge & Tunnel Authority VRDN
(FGIC)(A-1+/VMIG1)
19,300,000 4.00 01/07/97 19,300,000
- --------------------------------------------------------------------
$193,787,770
- --------------------------------------------------------------------
North Carolina--6.0%
North Carolina Eastern Municipal Power Agency RB Series 1988 B
(Morgan Guaranty/Union Bank of Switzerland LOC)(A-1+)
$ 2,700,000 3.70% 01/16/97 $ 2,700,000
10,000,000 3.70 01/27/97 10,000,000
Person County PCRB for Carolina Power & Light Series 1992 A
(A-1/P-1)
7,000,000 4.25 01/07/97 7,000,000
Rockingham County IDA PCRB for Philip Morris Co.(A-1/P-1)
3,960,000 4.15 01/07/97 3,960,000
North Carolina (continued)
Wake County PCRB for Carolina Power & Light Series 1990 A & B (Fuji
Bank LOC)(A-2/P-1)
$ 7,000,000 3.75% 02/06/97 $ 7,000,000
11,000,000 3.55 02/07/97 11,000,000
12,100,000 3.55 02/10/97 12,100,000
12,900,000 3.75 02/14/97 12,900,000
29,000,000 3.75 02/18/97 29,000,000
- -------------------------------------------------------------
$95,660,000
- -------------------------------------------------------------
Ohio--2.4%
Cleveland-Cuyahoga County Port Authority VRDN for Rock & Roll
Hall of Fame (Credit Local de France LOC)(A-1+)
$ 9,000,000 4.05% 01/07/97 $ 9,000,000
Columbus Electric System Series 1994 RB (Union Bank of Switzerland
LOC)(VMIG1)
10,620,000 3.35 01/31/97 10,620,000
Franklin County Hospital RB for Holy Cross Health System Series
1995(A-1/VMIG1)/(c)/
18,900,000 4.10 01/07/97 18,900,000
- -------------------------------------------------------------
$38,520,000
- -------------------------------------------------------------
Oregon--1.7%
Lane County PCRB VRDN for Weyerhaeuser Company Series 1994
(A-1)
$ 6,500,000 4.21% 01/07/97 $ 6,500,000
Portland VRDN for Columbia Grain Inc. Project (Fuji Bank/Bank of
Tokyo LOC)(VMIG1)
17,650,000 4.25 01/07/97 17,650,000
State of Oregon Veteran's Welfare Series 73 H VRDN (Morgan
Guaranty LOC)(A-1+/VMIG1)
3,400,000 4.00 01/07/97 3,400,000
- -------------------------------------------------------------
$27,550,000
- -------------------------------------------------------------
Pennsylvania--2.7%
Allegheny County PCRB for U.S. Steel Series 1985 (Commerzbank
LOC)(A-1+/P-1)
$28,400,000 3.50% 03/13/97 $28,400,000
Allegheny County PCRB for U.S. Steel Series 1986 (Commerzbank
LOC)(A-1+/P-1)
700,000 3.50 02/06/97 700,000
Philadelphia TRANS Series 1996-97 A(SP-1/VMIG1)
14,000,000 4.50 06/30/97 14,036,476
- --------------------------------------------------------------
$43,136,476
- --------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Puerto Rico--2.0%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$32,000,000 4.00% 07/30/97 $ 32,103,040
- -------------------------------------------------------------------
South Carolina--0.7%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/VMIG1)
$11,275,000 4.15% 01/07/97 $ 11,275,000
- -------------------------------------------------------------------
Texas--11.5%
Brazos Harbor IDA VRDN for Monsanto Co.(P-1)
$ 3,500,000 4.20% 01/07/97 $ 3,500,000
Brazos River Authority PCRB Series 1994 for Monsanto Co.(P-1)
5,100,000 4.20 01/07/97 5,100,000
Brazos River Authority VRDN for Monsanto Co.(P-1)
5,300,000 4.20 01/07/97 5,300,000
Brazos River Harbor Authority VRDN for Dow Chemical Corp. Series
1991(A-1/P-1)
13,500,000 3.60 01/24/97 13,500,000
Harris County Health Facilities Development Corp. UPDATE Series
1993(A-1+/VMIG1)
5,200,000 3.55 01/07/97 5,200,000
5,200,000 3.50 01/29/97 5,200,000
Harris County Hospital RB for Childrens Hospital Series 1989 B-2
(VMIG1)
7,900,000 4.10 01/07/97 7,900,000
Harris County Toll Road VRDN Series 1994 C(A-1+/VMIG1)
23,700,000 4.05 01/07/97 23,700,000
Nueces River IDA PCRB UPDATE for San Miguel Electric Series 1984
(CFC)(A-1+/VMIG1)
25,000,000 3.50 02/26/97 25,000,000
25,700,000 3.50 03/10/97 25,700,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
18,800,000 3.50 03/12/97 18,800,000
State of Texas TRANS Series 1996(SP-1+/VMIG1)/(c)/
25,000,000 4.75/(b)/ 08/29/97 25,193,274
20,000,000 4.75 08/29/97 20,154,620
- -------------------------------------------------------------------
$ 184,247,894
- -------------------------------------------------------------------
Utah--0.2%
Salt Lake County PCRB for Service Station/British Petroleum Series
1994 B(P-1)
$ 2,815,000 5.00% 01/01/97 $ 2,815,000
- -------------------------------------------------------------------
Virginia--6.7%
Chesapeake PCRB for Virginia Electric & Power Series
1985(A-1/P-1)
$22,000,000 3.60% 02/06/97 $22,000,000
Chesterfield County PCRB for Philip Morris Series 1987 A(A-1/P-1)
5,000,000 3.55 02/06/97 5,000,000
Chesterfield County PCRB for Philip Morris Series 1992(A-1/P-1)
14,700,000 4.15 01/07/97 14,700,000
Chesterfield County PCRB for Virginia Electric & Power Series 1985
(A-1/P-1)
8,000,000 3.60 02/07/97 8,000,000
5,200,000 3.60 02/12/97 5,200,000
Chesterfield County PCRB for Virginia Electric & Power
Series 1987 C(A-1/P-1)
1,000,000 3.60 02/12/97 1,000,000
Louisa PCRB For Virginia Electric & Power Series 1984(A-1/P-1)
4,000,000 3.60 02/07/97 4,000,000
4,000,000 3.60 02/13/97 4,000,000
3,000,000 3.60 02/14/97 3,000,000
Louisa PCRB for Virginia Electric & Power Series 1987(A-1/P-1)
1,300,000 3.55 02/06/97 1,300,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
20,400,000 4.10 01/07/97 20,400,000
Spotsylvania IDA for Carlisle Corporation (Suntrust Bank LOC)(AA3)
6,500,000 4.15/(b)/ 01/07/97 6,500,000
York County PCRB for Virginia Electric & Power Series 1985(A-1/P-1)
9,400,000 3.70 01/14/97 9,400,000
2,700,000 3.65 03/10/97 2,700,000
- -------------------------------------------------------------------
$ 107,200,000
- -------------------------------------------------------------------
Washington--4.6%
King County Sewer Revenue BANS Series A(A-1/P-1)
$10,000,000 3.55% 03/10/97 $10,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1992(A-1+)
1,000,000 4.21 01/07/97 1,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1993(A-1+)
5,850,000 4.21 01/07/97 5,850,000
Port of Kalama Floating/Fixed Rate for Conagra, Inc. Series 1983
(Morgan Guaranty Trust LOC)(AAA)
2,230,000 4.00 01/07/97 2,230,000
Union Gap City IDA VRDN for Weyerhaeuser Project Series 1992(A-1)
1,600,000 4.21 01/07/97 1,600,000
- ------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Washington (continued)
Washington Health Care Facilities Authority VRDN Series 1996
(Morgan Guaranty Trust LOC)(VMIG1)
$4,300,000 5.25% 01/01/97 $ 4,300,000
Washington Public Power Supply Project Electric RB Series 1993-1A
(Bank of America LOC)(A-1+/VMIG1)
10,860,000 4.10 01/07/97 10,860,000
Washington Public Power Supply Project Electric RB Series 1993-2A
(Bank of America LOC)(A-1/VMIG1)
11,100,000 4.10 01/07/97 11,100,000
Washington Public Power Supply System RB Series 1993-3A
(Bank of America LOC)(A-1+/VMIG1)
15,000,000 4.10/(b)/ 01/07/97 15,000,000
3,115,000 3.95 01/07/97 3,115,000
8,200,000 4.10 01/07/97 8,200,000
- -----------------------------------------------------------
$73,255,000
- -----------------------------------------------------------
Wyoming--1.4%
Pacificorp PCRB VRDN for Sweetwater County Series 1990 A
(Credit Suisse LOC)(VMIG1)
$16,200,000 4.15% 01/07/97 $16,200,000
Sweetwater County PCRB for Idaho Power Co. Series 1996 C
(A-1+/VMIG1)
6,100,000 5.10 01/01/97 6,100,000
- -----------------------------------------------------------
$22,300,000
- -----------------------------------------------------------
Total Investments $1,749,033,261/(a)/
==========================================================
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
/(b)/When-issued securities.
/(c)/Portions of these securities are being segregated for when-issued
securities.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those type of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
California--96.4%
California Health Facilities Authority VRDN for Kaiser Permanente
Series 1993 A, B & C RB(A-1+/VMIG1)
$ 2,000,000 4.00% 01/07/97 $ 2,000,000
California Health Facility Finance Authority RB Series
1990 A VRDN (Rabobank Nederland LOC)(A-1+/VMIG1)
8,100,000 4.00 01/07/97 8,100,000
California PCRB for Pacific Gas & Electric (Banque Nationale de Paris
LOC)(A-1+)
4,100,000 4.80 01/01/97 4,100,000
California Pollution Control Financing Authority for Southern
California Edison Adjustable TRB Series 1986 D(A-1/VMIG1)
1,800,000 4.70 01/01/97 1,800,000
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
10,000,000 3.47 01/31/97 10,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
25,500,000 4.01 01/07/97 25,500,000
California School Cash Reserves Program Authority Series 1996 A
(MBIA)(SP-1/VMIG1)
9,000,000 4.75 07/02/97 9,040,248
California School Cash Reserves Program Authority Series 1996 B
(MBIA)(VMIG1)
10,000,000 4.50 12/19/97 10,083,758
California Statewide Communities Development Authority
for Kaiser Foundation Hospital 1995 COPS(A-1+/VMIG1)
16,500,000 4.00 01/07/97 16,500,000
California Statewide Communities Development Authority RB Series
1995 A (A-1+)
13,900,000 3.90 01/07/97 13,900,000
California Statewide Communities Development Authority Series
1995A-1(A-1+)
14,200,000 3.90 01/07/97 14,200,000
California Statewide Communities Development Authority, Refunding
RB Series 1995A-2(A-1+)
5,500,000 3.90 01/07/97 5,500,000
Chula Vista RB Series 1996 A for San Diego Gas & Electric(A-
1/VMIG1)
11,200,000 5.10 01/01/97 11,200,000
City of Anaheim Electric RANS Tax Exempt CP
Notes(A-1+/P-1)
8,950,000 3.45 01/29/97 8,950,000
City of Fresno MF Hsg. Revenue Refunding Bonds Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
3,315,000 4.15 01/07/97 3,315,000
City of Irwindale IDRB Series 1984 for Toys-R-Us VRDN (Bankers
Trust LOC)(AA2)
2,000,000 4.13% 01/07/97 2,000,000
City of Los Angeles VRDN MF Hsg. Museum Terrace-84H (Bank of
America LOC)(VMIG1)
3,500,000 4.00 01/07/97 3,500,000
City of Newport Beach Floating/Fixed Rate Health Facilities Memorial
Hospital Facility VRDN(A-1/VMIG1)
10,750,000 5.15 01/01/97 10,750,000
City of Newport Beach VRDN RB Series 1996 A(A-1+)
3,800,000 5.15 01/01/97 3,800,000
City of Newport Beach VRDN RB Series 1996 B(A-1+)
23,000,000 5.15 01/01/97 23,000,000
City of San Diego VRDN MF Hsg. RB Series 1985 (Bank of
America LOC)(VMIG1)
15,700,000 4.05 01/07/97 15,700,000
City of San Diego MF Hsg. for Lacima Apartments VRDN (Citibank
LOC)(VMIG1)
13,125,000 4.05 01/07/97 13,125,000
City of San Diego MF Hsg. for Nobel Court Apartments VRDN
(Citibank LOC)(VMIG1)
11,555,000 4.05 01/07/97 11,555,000
Contra Costa MF Hsg. for Lakeshore Apartments VRDN(A-1+)
4,600,000 4.05 01/07/97 4,600,000
East Bay Municipal Utility District California Water & Waste
(A-1+/P-1)
4,300,000 3.45 02/27/97 4,300,000
Huntington Beach City Monthly MF Hsg. VRDN Series 1985 A (Bank
of America LOC)(VMIG1)
7,500,000 4.00 01/31/97 7,500,000
Kings County Housing Authority MF Hsg. Refunding RB Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
2,500,000 4.15 01/07/97 2,500,000
Los Angeles County Metro Transportation Authority VRDN
(MBIA)(SP-1+/VMIG1)
4,595,000 4.00 01/07/97 4,595,000
Los Angeles County Metro Transportation Authority RANS Series 1996
A(VMIG1)
10,000,000 4.00 02/27/97 10,013,586
Los Angeles County Metro Transportation CP Notes (National
Westminster/Union Bank of California/ABN Amro/Canadian
Imperial Bank of Commerce/Banque Nationale de Paris LOC)
(A-1+/P-1)
10,000,000 3.65 01/10/97 10,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
California (continued)
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty Trust
Co./Westdeutsche Landesbank Girozentrale/Bank of
America/Union Bank of Switzerland LOC)(SP-1+/VMIG1)
$16,400,000 4.50% 06/30/97 $16,456,497
Los Angeles County, VRDN MF Hsg. for Valencia Village Series 1984 C
(Industrial Bank of Japan Ltd. LOC)(A-1+)
16,400,000 2.80 01/07/97 16,400,000
Los Angeles Housing Authority MF Hsg. VRDN for Canyon Country
Villas Series 1985 H (Industrial Bank of Japan Ltd. LOC)(VMIG1)
19,000,000 2.80 01/07/97 19,000,000
Northern California Power Agency Geothermal Project Number 3
Adjustable Rate RB Series 1996 A (AMBAC)(A-1+/VMIG1)
8,500,000 3.85 01/07/97 8,500,000
Orange County Apartment Development RB Issue 1984 C Seaside
Meadow (Fuji Bank Ltd.)(A-1/VMIG1)
24,000,000 3.95 01/07/97 24,000,000
Pomona Public Financing Authority VRDN (Sumitomo Bank LOC)
(SP-1+)
2,075,000 4.25 01/07/97 2,075,000
Sacramento County 1990 COP Admin-Center Courthouse Project
VRDN (Union Bank of Switzerland LOC)(A-1+/VMIG1)
500,000 3.75 01/07/97 500,000
San Bernardino County VRDN-Woodview Apartments Series
1985 (Bank of America LOC)(VMIG1)
6,500,000 4.05 01/07/97 6,500,000
San Diego County MF Hsg. for Country Hills VRDN (FNMA)
(A-1+)
10,300,000 4.05 01/07/97 10,300,000
San Diego IDB Series 1995 B for San Diego Gas & Electric(A-1/VMIG1)
1,000,000 3.50 01/23/97 1,000,000
San Leandro MF Hsg. VRDN Series 1985 B- Haas Avenue
Apartments (Bank of America LOC)(VMIG1)
3,900,000 4.00 01/07/97 3,900,000
Southern California Metro Water District Series A CP Notes(A-1+/P-1)
5,400,000 3.50 02/20/97 5,400,000
Southern California Metropolitan Water District Revenue
Refunding Bonds Series 1996 A (AMBAC)(A-1+/VMIG1)
4,500,000 4.00 01/07/97 4,500,000
Southern California Public Power Authority 1991 Subordinated
Revenue Refunding Bonds (AMBAC)(A-1+/VMIG1)
9,100,000 3.90 01/07/97 9,100,000
Southern California Public Power Authority Power
Project RB Series 1996 B (AMBAC)(A-1+/VMIG1)
7,500,000 3.90 01/07/97 7,500,000
Southern California Public Power Authority Power
Project RB Series 1996 C (AMBAC)(A-1+/VMIG1)
10,000,000 3.90 01/07/97 10,000,000
Triunfo Sanitation District VRDN Refunding RB Series 1994 (Banque
Nationale de Paris LOC)(A-1+)
3,700,000 4.20 01/07/97 3,700,000
Tulare-Porterville Schools Finance Authority COPS (Union Bank of
California LOC)(VMIG1)
4,935,000 4.30 01/07/97 4,935,000
- -----------------------------------------------------------
$424,894,089
- -----------------------------------------------------------
Puerto Rico--3.2%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$14,000,000 4.00% 07/30/97 $14,045,081
- -----------------------------------------------------------
Total Investments $438,939,170/(a)/
===========================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York--94.2%
City of Yonkers IDA RB for Consumers (Industrial Bank
of Japan LOC)(VMIG1)
$2,700,000 3.90% 01/07/97 $2,700,000
City of Yonkers IDA Series 1991 Civic Facility RB
(Industrial Bank of Japan LOC)(VMIG1)
2,900,000 3.90 01/07/97 2,900,000
Great Neck North Water Authority Water System RB Series
1993 A VRDN (FGIC)(A-1+/VMIG1)
3,800,000 4.00 01/07/97 3,800,000
IDA Civic Facility RB Cold Spring Harbor Labs Series
1989 VRDN (Morgan Guaranty Trust LOC)(A-1+)
2,200,000 4.90 01/01/97 2,200,000
Metropolitan Museum of Art Variable Rate Interest
Bonds(AA/AA)
1,500,000 4.00 01/07/97 1,500,000
Metropolitan Transportation Authority Commuter Facility
VRDN Series 1991 (National Westminster/Morgan
Guaranty/Industrial Bank of Japan/Sumitomo Bank/J.P.
Morgan/Bank of Tokyo LOC)(A-1+/VMIG1)
3,400,000 4.05 01/07/97 3,400,000
Nassau County TANS Series 1996 B(SP-1+)
3,500,000 4.25 08/29/97 3,515,754
New York City GO Bonds (Sumitomo Bank LOC)(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
New York City GO Fiscal 1995 Series B-6
(MBIA)(A-1+/VMIG1)
3,900,000 5.10 01/01/97 3,900,000
1,250,000 5.10 01/01/97 1,250,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
4,000,000 4.50 04/15/97 4,009,256
New York City IDA - Civic Facility RB 1989 National
Audubon Society, Inc. (Swiss Bank Corp. LOC)(A-1+)
4,000,000 4.80 01/01/97 4,000,000
New York City IDA for Columbia Grammar Prep School VRDN
(Chemical Bank LOC)(A-1+)
2,500,000 4.15 01/07/97 2,500,000
New York City Municipal Water Finance Authority CP
Series 1 (Canadian Imperial Bank of Commerce
LOC)(P-1)
6,900,000 3.55 01/16/97 6,900,000
New York City Municipal Water Finance Authority Series
3 (Toronto Dominion Bank/Bank of Nova Scotia
LOC)(P-1)
2,500,000 3.50 03/11/97 2,500,000
New York City Trust for Cultural Resources American
Museum of Natural History Adjustable Rate TRB VRDN
(MBIA)(VMIG1)
$3,200,000 3.80% 01/07/97 $3,200,000
New York State Dormitory Authority RB Series 1990 B for
Cornell University VRDN(VMIG1)
4,700,000 4.80 01/01/97 4,700,000
New York State Energy Research & Development Authority
For Long Island Lighting Co. VRDN (Toronto Dominion
Bank LOC) (A-1+/P-1)
3,000,000 4.05 01/07/97 3,000,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 B
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
7,800,000 5.00 01/01/97 7,800,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 D
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
3,600,000 4.40 01/01/97 3,600,000
New York State Energy Research & Development Authority
PCRB for Rochester Gas & Electric Series 1984
(Credit Suisse LOC)(P-1)
2,100,000 3.40 01/31/97 2,100,000
New York State Energy Research & Development Authority
PCRB Series A & B - Central Hudson Gas & Electric
VRDN (Deutsche Bank LOC)(AA2)
1,300,000 3.90 01/07/97 1,300,000
New York State Energy Research & Development Authority
for Orange and Rockland Utilities Series 1995 A VRDN
(AMBAC)(A-1+/VMIG1)
5,000,000 3.80 01/07/97 5,000,000
New York State GO BANS Series R(A-1/P-1)
4,500,000 3.55 02/25/97 4,500,000
New York State GO BANS Series T(A-1/P-1)
3,500,000 3.55 02/24/97 3,500,000
New York State Housing Finance Agency for Normandie
Court Housing RB Series 1987 A (Fleet Bank
LOC)(VMIG1)
5,100,000 4.00 01/07/97 5,100,000
New York State Local Government Assistance Series 1995
B VRDN (Bank of Nova Scotia LOC)(A-1+/VMIG1)
1,700,000 4.00 01/07/97 1,700,000
New York State Local Government Series C VRDN
(Landesbank Hessen-Thueringen Girozentrale
LOC)(A-1+/VMIG1)
7,000,000 4.00 01/07/97 7,000,000
- ----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York (continued)
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
$700,000 3.85% 01/07/97 $ 700,000
New York State Medical Care Facility Financing Agency
for Children's Hospital of Buffalo RB Series 1991 A
(Barclays Bank LOC)(VMIG1)
1,900,000 4.20 01/07/97 1,900,000
New York State Triborough Bridge & Tunnel Authority
VRDN (FGIC)(A-1+/VMIG1)
4,700,000 4.00 01/07/97 4,700,000
Oswego County IDA PCRB Series 1992 for Philip
Morris(A-1/P-1)
1,000,000 4.15 01/07/97 1,000,000
Syracuse University IDA VRDN (Morgan Guaranty
LOC)(AA+/A-1 /VMIG1)
1,200,000 4.80 01/01/97 1,200,000
- -----------------------------------------------------------
$107,875,010
- -----------------------------------------------------------
Puerto Rico--5.7%
Commonwealth of Puerto Rico RANS Series 1997
A(SP-1+/VMIG1)
$3,500,000 4.00% 07/30/97 $ 3,511,271
Puerto Rico Government Development Bank VRDN (Credit
Suisse LOC)(A-1/VMIG1)
1,000,000 3.75 01/07/97 1,000,000
Puerto Rico Medical and Environmental PCRB Series 1983
A for Key Pharmaceuticals Inc. (Morgan Guaranty LOC)
2,000,000 3.75 12/01/97 2,000,000
- -----------------------------------------------------------
$ 6,511,271
- -----------------------------------------------------------
Total Investments $114,386,281/(a)/
===========================================================
/(a)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
BANS --Bond Anticipation Notes
CFC --Unconditionally Guaranteed by
Cooperative Finance Corp.
COPS --Certificates of Particication
CP --Commercial Paper
FGIC --Insured by Financial Guaranty
Insurance Co.
FNMA --Federal National Mortgage
Association
GO --General Obligation
HFA --Health Facility Authority
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDR --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TANS --Tax Anticipation Notes
TECP --Tax Exempt Commercial Paper
TRANS --Tax Revenue Anticipation Notes
TRB --Tender Revenue Bond
UPDATE --Unit Priced Daily Adjustable
Tax-Exempt Security
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- --------------------------------------
[This page intentionally left blank]
- -------------------------------------- -------------------------------------
23
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
==============================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value based on amortized cost $1,266,243,902 $ 990,797,391 $ 827,240,879
Interest receivable 3,701,956 3,538,130 1,378,983
Cash 143,480 128,908 152,717
Other assets 18,680 33,706 48,509
- ------------------------------------------------------------------------------------------------------------------------
Total assets 1,270,108,018 994,498,135 828,821,088
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investment securities purchased -- -- --
Dividends payable 5,999,306 4,784,617 3,427,645
Accrued expenses and other liabilities 530,616 513,611 459,492
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,529,922 5,298,228 3,887,137
- ------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 1,263,578,517 989,199,498 824,862,428
Accumulated undistributed net investment income -- -- --
Accumulated undistributed net realized gain (loss) on investment
transactions (421) 409 71,523
- ------------------------------------------------------------------------------------------------------------------------
Net assets $1,263,578,096 $ 989,199,907 824,933,951
========================================================================================================================
Net asset value, offering and redemption price per unit
(net assets/units outstanding) $ 1.00 $ 1.00 $ 1.00
========================================================================================================================
Units Outstanding:
ILA units 1,154,745,689 703,096,586 694,604,345
ILA Administration units 23,775,858 257,258,398 36,044,854
ILA Service units 84,710,642 28,844,514 94,213,229
ILA B units 346,328 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total units of beneficial interest outstanding, $.001 par value
(unlimited number of units authorized) 1,263,578,517 989,199,498 824,862,428
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
================================================================================================
<S> <C> <C> <C> <C> <C>
$ 810,267,968 $1,221,566,240 $3,300,609,972 $1,749,033,261 $438,939,170 $114,386,281
532,015 14,004,604 4,477,173 7,404,080 2,433,885 404,538
99,319 148,266 365,400 1,862,438 599,385 41,299
775 10,026 125,725 8,601 8,650 --
- ------------------------------------------------------------------------------------------------
810,900,077 1,235,729,136 3,305,578,270 1,758,308,380 441,981,090 114,832,118
- ------------------------------------------------------------------------------------------------
-- -- -- 150,828,428 -- --
3,404,801 4,597,910 13,642,248 4,524,992 1,168,073 274,842
428,726 525,543 1,305,746 494,147 194,663 62,795
- ------------------------------------------------------------------------------------------------
3,833,527 5,123,453 14,947,994 155,847,567 1,362,736 337,637
- ------------------------------------------------------------------------------------------------
$ 807,035,766 1,230,590,333 3,290,699,109 1,602,342,561 440,637,879 114,499,366
-- -- -- 362,642 10,495 1,634
30,784 15,350 (68,833) (244,390) (30,020) (6,519)
- ------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $440,618,354 $114,494,481
================================================================================================
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================================
574,608,995 708,990,271 2,303,703,731 1,514,523,522 440,495,857 70,178,026
108,916,431 137,701,171 794,578,398 59,097,259 142,022 44,321,340
123,510,340 383,898,891 192,416,980 28,918,372 -- --
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
807,035,766 1,230,590,333 3,290,699,109 1,602,539,153 440,637,879 114,499,366
================================================================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
=========================================
<S> <C> <C> <C>
Investment income:
Interest income $81,770,923 $54,320,799 $39,035,321
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 5,185,990 3,447,586 2,509,206
Transfer agent fees 592,685 394,010 286,766
Custodian fees 289,863 203,454 157,058
Professional fees 43,453 28,965 22,465
Trustees' fees 19,256 10,622 9,356
Other 178,787 197,862 186,415
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 6,310,034 4,282,499 3,171,266
Less--Expenses reimbursable and fees waived by Goldman Sachs (234,432) (736,102) (231,536)
- ----------------------------------------------------------------------------------------------------------------------
Net expenses 6,075,602 3,546,397 2,939,730
Administration unit fees 65,534 316,155 63,048
Service unit fees 494,274 128,313 352,931
- ----------------------------------------------------------------------------------------------------------------------
Net expenses and unit fees 6,635,410 3,990,865 3,355,709
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 75,135,513 50,329,934 35,679,612
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $75,207,918 $50,402,799 $35,742,274
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================
<S> <C> <C> <C> <C> <C>
$48,666,691 $53,608,537 $146,327,912 $54,107,112 $13,695,668 $3,421,539
----------------------------------------------------------------------------------------
3,157,511 3,629,131 9,496,253 5,391,039 1,410,751 359,201
360,858 414,758 1,085,286 616,119 161,229 41,051
197,650 167,744 459,900 135,944 45,236 21,336
27,555 34,247 77,027 42,553 13,995 6,322
11,552 12,842 34,394 17,650 4,574 1,215
157,226 213,340 423,802 136,197 38,866 7,681
- -----------------------------------------------------------------------------------------
3,912,352 4,472,062 11,576,662 6,339,502 1,674,651 436,806
(212,886) (2,294,583) (4,522,286) (1,564,664) (22,092) (108,395)
----------------------------------------------------------------------------------------
3,699,466 2,177,479 7,054,376 4,774,838 1,652,559 328,411
145,201 145,441 906,321 73,660 262 39,843
579,790 1,266,586 562,023 130,158 -- --
- -----------------------------------------------------------------------------------------
4,424,457 3,589,506 8,522,720 4,978,656 1,652,821 368,254
- -----------------------------------------------------------------------------------------
44,242,234 50,019,031 137,805,192 49,128,456 12,042,847 3,053,285
- -----------------------------------------------------------------------------------------
195,578 416,602 (4,477) (12,968) 15 (4,539)
- -----------------------------------------------------------------------------------------
$44,437,812 $50,435,633 $137,800,715 $49,115,488 $12,042,862 $3,048,746
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 75,135,513 $ 50,329,934 $ 35,679,612
Net realized gain(loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 75,207,918 50,402,799 35,742,274
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (67,076,054) (38,261,044) (29,556,990)
ILA Administration units (2,206,827) (10,545,315) (2,048,010)
ILA Service units (5,850,540) (1,523,575) (4,074,612)
ILA B units (2,092) -- --
Net realized gain on investment transactions
ILA units (65,059) (54,983) (38,029)
ILA Administration units (2,127) (15,267) (2,635)
ILA Service units (5,640) (2,206) (5,242)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (75,208,339) (50,402,390) (35,725,518)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 9,633,671,566 8,281,604,075 5,115,245,365
Reinvestment of dividends and distributions 40,414,429 38,191,105 17,312,306
Cost of units repurchased (9,962,009,233) (8,092,253,028) (5,011,078,568)
- ----------------------------------------------------------------------------------------------------------------------
Increase(decrease) in net assets resulting from unit transactions (287,923,238) 227,542,152 121,479,103
- ----------------------------------------------------------------------------------------------------------------------
Total increase(decrease) (287,923,659) 227,542,561 121,495,859
Net Assets:
Beginning of year 1,551,501,755 761,657,346 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,263,578,096 $ 989,199,907 $ 824,933,951
======================================================================================================================
Accumulated undistributed net investment income -- -- --
======================================================================================================================
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 8,756,241,159 5,161,953,773 4,490,979,392
Reinvestment of dividends and distributions 36,833,028 30,348,683 13,978,786
Units repurchased (8,899,537,496) (5,063,361,34) (4,380,790,567)
- ----------------------------------------------------------------------------------------------------------------------
(106,463,309) 128,941,113 124,167,611
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 318,656,203 2,902,067,359 220,574,807
Reinvestment of dividends and distributions 1,520,549 7,510,848 283,223
Units repurchased (359,456,201) (2,816,742,074) (232,371,387)
- ----------------------------------------------------------------------------------------------------------------------
(39,279,449) 92,836,133 (11,513,357)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 558,266,701 217,582,943 403,691,166
Reinvestment of dividends and distributions 2,060,072 331,574 3,050,297
Units repurchased (702,853,581) (212,149,611) (397,916,614)
- ----------------------------------------------------------------------------------------------------------------------
(142,526,808) 5,764,906 8,824,849
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (288,269,566)* 227,542,152 121,479,103
======================================================================================================================
</TABLE>
* In addition, ILA B units had sales, reinvestments of dividends and
distributions and repurchases of 507,503, 780 and 161,955 units,
respectively, for a net increase of 346,328 units.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 44,242,234 $ 50,019,031 $ 137,805,192 $ 49,128,456 $ 12,042,847 $ 3,053,285
195,578 416,602 (4,477) (12,968) 15 (4,539)
- ------------------------------------------------------------------------------------------------------
44,437,812 50,435,633 137,800,715 49,115,488 12,042,862 3,048,746
- ------------------------------------------------------------------------------------------------------
(32,818,890) (30,911,761) (101,011,206) (46,819,418) (12,036,826) (2,289,010)
(4,742,767) (4,651,770) (30,041,532) (1,375,597) (6,021) (764,275)
(6,680,577) (14,455,500) (6,752,454) (933,441) -- --
-- -- -- -- -- --
(124,367) (251,459) -- -- -- --
(17,973) (37,841) -- -- -- --
(25,316) (117,591) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(44,409,890) (50,425,922) (137,805,192) (49,128,456) (12,042,847) (3,053,285)
- ------------------------------------------------------------------------------------------------------
5,362,879,167 5,282,794,697 15,965,974,823 9,518,523,372 2,958,021,573 648,758,829
13,347,956 20,444,542 79,358,869 35,078,864 11,445,149 2,949,980
(5,492,732,128) (4,850,904,367) (15,106,127,095) (9,392,133,030) (2,875,637,134) (654,470,394)
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
- ------------------------------------------------------------------------------------------------------
(116,477,083) 452,344,583 939,202,120 161,456,238 93,829,603 (2,766,124)
923,543,633 778,261,100 2,351,428,156 1,441,004,575 346,788,751 117,260,605
- ------------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $ 440,618,354 $114,494,481
=======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
=======================================================================================================
3,696,243,017 3,783,423,031 11,171,686,790 9,264,641,627 2,957,305,487 340,781,821
11,811,603 19,300,481 66,486,820 34,471,658 11,444,982 2,236,468
(3,844,547,762) (3,680,022,103) (10,666,427,699) (9,127,243,309) (2,875,001,835) (363,376,230)
- ------------------------------------------------------------------------------------------------------
(136,493,142) 122,701,409 571,745,911 171,869,976 93,748,634 (20,357,941)
- ------------------------------------------------------------------------------------------------------
659,581,577 470,006,128 3,606,492,816 142,908,870 716,086 307,977,008
855,243 1,082,829 11,506,068 298,114 167 713,512
(644,240,509) (402,096,387) (3,340,378,274) (132,882,806) (635,299) (291,094,164)
- ------------------------------------------------------------------------------------------------------
16,196,311 68,992,570 277,620,610 10,324,178 80,954 17,596,356
- ------------------------------------------------------------------------------------------------------
1,007,054,573 1,029,365,538 1,187,795,217 110,972,875 -- --
681,110 61,232 1,365,981 309,092 -- --
(1,003,943,857) (768,785,877) (1,099,321,122) (132,006,915) -- --
- ------------------------------------------------------------------------------------------------------
3,791,826 260,640,893 89,840,076 (20,724,948) -- --
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
----------------------------------------------
<S> <C> <C> <C>
From Operations:
Net investment income $ 107,583,870 $ 49,478,386 $ 51,830,087
Net realized gain (loss) on investment transactions 14,828 23,170 168,758
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 107,598,698 49,501,556 51,998,845
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (90,145,210) (39,853,826) (42,814,965)
ILA Administration units (5,198,674) (8,266,526) (3,434,653)
ILA Service units (12,239,986) (1,358,034) (5,580,469)
Net realized gain on investment transactions
ILA units (12,607) (18,166) (138,212)
ILA Administration units (741) (4,378) (12,197)
ILA Service units (1,480) (626) (17,502)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (107,598,698) (49,501,556 ) (51,997,998)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 12,338,624,975 6,865,371,082 6,147,457,376
Reinvestment of dividends and distributions 46,658,797 34,033,174 18,869,484
Cost of units repurchased (13,117,315,317) 6,864,945,994) (6,596,822,965)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets resulting from unit
transactions (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (732,031,545) 34,458,262 (430,495,258)
Net Assets:
Beginning of year 2,283,533,300 727,199,084 1,133,933,350
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,551,501,755 $ 761,657,346 $ 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 10,673,706,881 5,167,984,860 5,286,093,615
Reinvestment of dividends and distributions 43,663,215 30,173,260 14,307,877
Units repurchased (11,419,966,319) (5,183,472,607) (5,611,448,715)
- ----------------------------------------------------------------------------------------------------------------------
(702,596,223) 14,685,513 (311,047,223)
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 801,545,537 1,503,847,493 385,128,154
Reinvestment of dividends and distributions 1,574,573 3,545,805 410,476
Units repurchased (889,335,631) (1,488,837,741) (433,455,523)
- ----------------------------------------------------------------------------------------------------------------------
(86,215,521) 18,555,557 (47,916,893)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 863,372,557 193,538,729 476,235,607
Reinvestment of dividends and distributions 1,421,009 314,109 4,151,131
Units repurchased (808,013,367) (192,635,646) (551,918,727)
- ----------------------------------------------------------------------------------------------------------------------
56,780,199 1,217,192 (71,531,989)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
======================================================================================================
<S> <C> <C> <C> <C> <C>
$ 49,882,996 $ 39,027,924 $ 127,991,600 $ 55,137,781 $ 10,292,899 $ 3,354,557
634,764 426,028 (11,971) (38,116) (4,501) --
- ------------------------------------------------------------------------------------------------------
50,517,760 39,453,952 127,979,629 55,099,665 10,288,398 3,354,557
- ------------------------------------------------------------------------------------------------------
(37,834,730) (31,147,754) (98,487,540) (50,915,901) (10,279,510) (2,746,431)
(5,921,841) (3,930,340) (26,181,728) (2,430,414) (13,389) (608,126)
(6,116,634) (3,949,830) (3,322,332) (1,791,466) -- --
(474,791) (338,176) -- -- -- --
(76,052) (43,832) -- -- -- --
(81,059) (43,878) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(50,505,107) (39,453,810) (127,991,600) (55,137,781) (10,292,899) (3,354,557)
- ------------------------------------------------------------------------------------------------------
5,295,765,985 4,545,981,787 12,879,366,733 9,669,281,502 2,111,844,558 637,393,901
14,985,214 18,329,605 59,359,416 35,116,542 9,384,940 3,009,869
(5,307,633,793) (4,472,240,590) (12,558,288,438) (9,832,589,904) (2,002,625,120) (646,630,502)
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ------------------------------------------------------------------------------------------------------
3,130,059 92,070,944 380,425,740 (128,229,976) 118,599,877 (6,226,732)
920,413,574 686,190,156 1,971,002,416 1,569,234,551 228,188,874 123,487,337
- ------------------------------------------------------------------------------------------------------
$ 923,543,633 $ 778,261,100 $2,351,428,156 $1,441,004,575 $ 346,788,751 $117,260,605
======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
======================================================================================================
4,098,618,029 3,716,958,431 9,845,256,084 9,311,743,687 2,111,311,145 412,445,304
12,443,257 17,215,281 53,443,869 34,419,501 9,375,255 2,397,973
(4,113,675,854) (3,695,227,116) (9,792,323,613) (9,438,508,967) (2,001,353,653) (408,825,174)
- ------------------------------------------------------------------------------------------------------
(2,614,568) 38,946,596 106,376,340 (92,345,779) 119,332,747 6,018,103
- ------------------------------------------------------------------------------------------------------
852,080,094 450,755,034 2,431,546,258 230,975,117 533,413 224,948,597
2,541,957 1,065,347 5,373,341 522,467 9,685 611,896
(859,607,724) (447,499,474) (2,249,895,904) (280,499,429) (1,271,467) (237,805,328)
- ------------------------------------------------------------------------------------------------------
(4,985,673) 4,320,907 187,023,695 (49,001,845) (728,369) (12,244,835)
- ------------------------------------------------------------------------------------------------------
345,067,862 378,268,322 602,564,391 126,562,698 -- --
-- 48,977 542,206 174,574 -- --
(334,350,215) (329,514,000) (516,068,921) (113,581,508) -- --
- ------------------------------------------------------------------------------------------------------
10,717,647 48,803,299 87,037,676 13,155,764 -- --
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Goldman Sachs--Institutional Liquid Assets Portfolios ("ILA"). The Trust is
registered under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. ILA consists of nine portfolios: Prime
Obligations, Money Market, Government, Treasury Obligations, Treasury
Instruments, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York. All of the portfolios are diversified except for the Tax-Exempt
California and Tax-Exempt New York Portfolios. ILA offers three classes of units
for each of its portfolios: ILA units, ILA Administration units and ILA Service
units. In addition, Prime Obligations offers ILA B units. The investment
objective of the Funds is to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ILA. The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
ILA uses the amortized-cost method for valuing portfolio securities, which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
---------------
It is each portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all investment company taxable and tax-exempt income to
its unitholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to unitholders for financial reporting
purposes is determined in accordance with federal income tax rules. Therefore,
the source of the Portfolios' distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1996, ILA's tax year end, the following portfolios had capital
loss carryforwards for U.S. Federal tax purposes of approximately:
<TABLE>
<CAPTION>
Years of
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Federal $ 72,000 2000 to 2004
Tax-Exempt Diversified 244,000 1997 to 2004
Tax-Exempt California 30,000 1999 to 2003
Tax-Exempt New York 7,000 1999 to 2004
</TABLE>
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
D. Expenses--
- --------------
Expenses incurred by ILA which do not specifically relate to an individual
portfolio of ILA are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Unitholders of ILA Administration, ILA Service and ILA B units bear all
expenses and fees paid to service and distribution organizations for their
services with respect to such units as well as other expenses (subject to
expense limitations) which are directly attributable to such units.
- --------------------------------------------------------------------------------
32
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31,1996
- --------------------------------------------------------------------------------
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser pursuant to
an Advisory Agreement. Under the Advisory Agreement, GSAM, subject to general
supervision of the Trust's Board of Trustees, manages the portfolios and
provides for the administration of ILA's other affairs. As compensation for the
services rendered under the Advisory Agreement and the assumption of the
expenses related thereto, GSAM is entitled to a fee, computed daily and payable
monthly, at an annual rate equal to .35% of each portfolio's average daily net
assets. For the year ended December 31, 1996 and until further notice, GSAM has
agreed to waive advisory fees of .05%, .20%, .15%, .10% and .09% for the Money
Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios, respectively.
Goldman Sachs also serves as ILA's transfer agent under a Transfer Agency
Agreement for a fee. In addition, Goldman Sachs acts as ILA's distributor under
a Distribution Agreement for which it receives no compensation. Amounts due to
Goldman Sachs are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
GSAM has voluntarily agreed that if the sum of a portfolio's expenses
(including the advisory fee, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses, administration, authorized
dealer service, distribution and service plan fees and other extraordinary
expenses) exceeds on an annualized basis .41% of such portfolio's net assets,
the portfolio will be reimbursed in the amount of such excess monthly.
In addition, GSAM has voluntarily agreed to reimburse the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios to the extent that each portfolio's expenses, as defined above,
exceed .36%, .21%, .26%, .31% and .32%, respectively, of the average net assets
per annum. Amounts due from Goldman Sachs at December 31, 1996 are included in
"Other assets" in the accompanying Statements of Assets and Liabilities.
The ILA B units of Prime Obligations Portfolio have adopted a Distribution
Plan (the "Distribution Plan") pursuant to Rule 12b-1. Under the Distribution
Plan, Goldman Sachs is entitled to a quarterly fee for distribution services
equal, on an annual basis, up to .75% of ILA B units average daily net assets.
The ILA B units of Prime Obligations Portfolio have adopted an Authorized
Dealer Service Plan (the "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for providing personal and account
maintenance services. ILA B units pay a fee under this Service Plan equal, on an
annual basis, up to .25% of ILA Class B's average daily net assets.
The chart below outlines the fee waivers and expense reimbursements for the
year ended December 31, 1996 and amounts owed to and due from Goldman Sachs at
December 31, 1996 (in thousands):
- -------------------------------------------------------------------------------
Due to
Goldman
Sachs Amounts
Adviser Expense for Adviser/ due from
Fee Reimburse- Transfer Goldman
Fund Waived ments Total Agent Fees Sachs
================================================================================
Prime
Obligations
Portfolio $-- $234 $234 $462 $18
- --------------------------------------------------------------------------------
Money
Market
Portfolio 493 243 736 318 34
- --------------------------------------------------------------------------------
Government
Portfolio -- 232 232 265 45
- --------------------------------------------------------------------------------
Treasury
Obligations
Portfolio -- 213 213 267 --
- --------------------------------------------------------------------------------
Treasury
Instruments
Portfolio 2,074 221 2,295 180 10
- --------------------------------------------------------------------------------
Federal
Portfolio 4,070 452 4,522 648 126
- --------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio 1,540 25 1,565 399 --
- --------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio -- 22 22 147 --
- -------------------------------------------------------------------------------
Tax-Exempt
New York
Portfolio 92 16 108 26 --
- -------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
4. Administration and Service Plans
ILA has adopted Administration and Service Plans. These plans allow for ILA
Administration units and ILA Service units, respectively, to compensate service
organizations for providing varying levels of account administration and
unitholder liaison services to their customers who are beneficial owners of such
units. The Administration and Service Plans provide for compensation to the
service organizations in an amount up to .15% and .40% (on an annualized basis),
respectively, of the average daily net asset value of the respective units.
5. Line of Credit Facility
ILA participates in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Portfolio must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended
December 31, 1996, ILA did not have any borrowings under this facility.
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping by the custodian.
7. Joint Repurchase Agreement Accounts
The ILA Portfolios, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, may transfer uninvested cash
balances into joint accounts, the daily aggregate balances of which are invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations.
As of December 31, 1996, the Prime Obligations, Money Market, Government and
Treasury Obligations Portfolios had investments in the following joint account
of $21,400,000, $77,200,000, $305,000,000 and $327,900,000 in principal amount,
respectively. As of December 31, 1996, the repurchase agreements in this joint
account, along with the corresponding underlying securities (including the type
of security, market value, interest rate and maturity date), were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933
(U.S. Treasury Notes: $129,531,177, 4.75%-8.88%,01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
================================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Portfolio may enter into
certain principal transactions, including repurchase agreements, with Goldman,
Sachs & Co. subject to certain limitations which include the following: 25% of
eligible security transactions, as defined, and 10% of repurchase agreement
transactions.
- --------------------------------------------------------------------------------
34
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end Total
of period income transactions operations to unitholders of period return/(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... $1.00 $0.0511 -- $0.0511 $(0.0511) $1.00 5.22%
1996-ILA Administration units ....... 1.00 0.0497 -- 0.0497 (0.0497) 1.00 5.06
1996-ILA Service units .............. 1.00 0.0474 -- 0.0474 (0.0474) 1.00 4.80
1996-ILA B units/(b)/................ 1.00 0.0262 -- 0.0262 (0.0262) 1.00 3.97/(d)/
1995-ILA units ...................... 1.00 0.0566 -- 0.0566 (0.0566) 1.00 5.79
1995-ILA Administration units ....... 1.00 0.0551 -- 0.0551 (0.0551) 1.00 5.63
1995-ILA Service units .............. 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.37
1994-ILA units ...................... 1.00 0.0394 -- 0.0394 (0.0394) 1.00 4.07
1994-ILA Administration units ....... 1.00 0.0379 -- 0.0379 (0.0379) 1.00 3.91
1994-ILA Service units .............. 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.66
1993-ILA units ...................... 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00 2.97
1993-ILA Administration units ....... 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00 2.82
1993-ILA Service units .............. 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00 2.56
1992-ILA units ...................... 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00 3.75
1992-ILA Administration units ....... 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00 3.60
1992-ILA Service units .............. 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00 3.34
1991-ILA units ...................... 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00 6.10
1991-ILA Administration units ....... 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00 5.94
1991-ILA Service units .............. 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00 5.68
1990-ILA units ...................... 1.00 0.0793 -- 0.0793 (0.0793) 1.00 8.21
1990-ILA Administration units /(c)/.. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.81/(d)/
1990-ILA Service units/(c)/.......... 1.00 0.0425 -- 0.0425 (0.0425) 1.00 7.56/(d)/
1989-ILA units ...................... 1.00 0.0890 -- 0.0890 (0.0890) 1.00 9.27
1988-ILA units ...................... 1.00 0.0714 -- 0.0714 (0.0714) 1.00 7.48
1987-ILA units ...................... 1.00 0.0634 -- 0.0634 (0.0634) 1.00 6.50
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
===========================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... 0.41% 5.11% $1,154,787 0.43% 5.09%
1996-ILA Administration units ....... 0.56 4.97 23,738 0.58 4.95
1996-ILA Service units .............. 0.81 4.74 84,707 0.83 4.72
1996-ILA B units/(b)/................ 1.41/(d)/ 4.09/(d)/ 346 1.43/(d)/ 4.07/(d)/
1995-ILA units ...................... 0.41 5.66 1,261,251 0.43 5.64
1995-ILA Administration units ....... 0.56 5.51 63,018 0.58 5.49
1995-ILA Service units .............. 0.81 5.22 227,233 0.83 5.20
1994-ILA units ...................... 0.40 3.94 1,963,846 0.42 3.92
1994-ILA Administration units ....... 0.55 3.79 149,234 0.57 3.77
1994-ILA Service units .............. 0.80 3.65 170,453 0.82 3.63
1993-ILA units ...................... 0.40 2.91 2,332,771 0.42 2.89
1993-ILA Administration units ....... 0.55 2.75 189,431 0.57 2.73
1993-ILA Service units .............. 0.80 2.50 137,804 0.82 2.48
1992-ILA units ...................... 0.40 3.64 3,444,591 0.42 3.62
1992-ILA Administration units ....... 0.55 3.39 257,321 0.57 3.37
1992-ILA Service units .............. 0.80 3.11 22,044 0.82 3.09
1991-ILA units ...................... 0.40 5.91 3,531,736 0.42 5.89
1991-ILA Administration units ....... 0.55 5.68 198,417 0.57 5.66
1991-ILA Service units .............. 0.80 5.58 18,789 0.82 5.56
1990-ILA units ...................... 0.38 7.93 2,833,541 0.38 7.93
1990-ILA Administration units /(c)/.. 0.55/(d)/ 7.62/(d)/ 209,272 0.55/(d)/ 7.62/(d)/
1990-ILA Service units/(c)/.......... 0.80/(d)/ 7.25/(d)/ 19,039 0.80/(d)/ 7.25/(d)/
1989-ILA units ...................... 0.40 8.90 3,761,964 0.40 8.90
1988-ILA units ...................... 0.40 7.14 3,799,628 0.40 7.14
1987-ILA units ...................... 0.40 6.34 5,814,280 0.40 6.34
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ILA Class B unit activity commenced during May of 1996.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
/(d)/Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. $1.00 $0.0515 $0.0001 $0.0516 $(0.0516) $1.00 5.27%
1996-ILA Administration
units ................... 1.00 0.0500 0.0001 0.0501 (0.0501) 1.00 5.12
1996-ILA Service units ..... 1.00 0.0475 0.0001 0.0476 (0.0476) 1.00 4.86
1995-ILA units ............. 1.00 0.0571 -- 0.0571 (0.0571) 1.00 5.85
1995-ILA Administration
units ................... 1.00 0.0555 -- 0.0555 (0.0555) 1.00 5.69
1995-ILA Service units ..... 1.00 0.0529 -- 0.0529 (0.0529) 1.00 5.43
1994-ILA units ............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.13
1994-ILA Administration
units ................... 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.98
1994-ILA Service units ..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.72
1993-ILA units ............. 1.00 0.0296 0.0003 0.0299 (0.0299) 1.00 3.03
1993-ILA Administration
units ................... 1.00 0.0281 0.0003 0.0284 (0.0284) 1.00 2.88
1993-ILA Service units ..... 1.00 0.0257 0.0002 0.0259 (0.0259) 1.00 2.62
1992-ILA units ............. 1.00 0.0368 0.0004 0.0372 (0.0372) 1.00 3.76
1992-ILA Administration
units ................... 1.00 0.0356 0.0004 0.0360 (0.0360) 1.00 3.61
1992-ILA Service units ..... 1.00 0.0358 0.0006 0.0364 (0.0364) 1.00 3.35
1991-ILA units ............. 1.00 0.0591 0.0004 0.0595 (0.0595) 1.00 6.12
1991-ILA Administration
units ................... 1.00 0.0574 0.0004 0.0578 (0.0578) 1.00 5.96
1991-ILA Service units ..... 1.00 0.0547 0.0004 0.0551 (0.0551) 1.00 5.70
1990-ILA units ............. 1.00 0.0793 0.0001 0.0794 (0.0794) 1.00 8.24
1990-ILA Administration
units/(c)/............... 1.00 0.0424 0.0001 0.0425 (0.0425) 1.00 7.86/(b)/
1990-ILA Service units/(c)/. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.61/(b)/
1989-ILA units ............. 1.00 0.0885 0.0001 0.0886 (0.0886) 1.00 9.31
1988-ILA units ............. 1.00 0.0751 -- 0.0751 (0.0751) 1.00 7.66
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 1.00 0.0063 -- 0.0063 (0.0063) 1.00 7.38/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. 0.36% 5.15% $703,097 0.43% 5.08%
1996-ILA Administration
units ................... 0.51 5.00 257,258 0.58 4.93
1996-ILA Service units ..... 0.76 4.75 28,845 0.83 4.68
1995-ILA units ............. 0.36 5.71 574,155 0.42 5.65
1995-ILA Administration
units ................... 0.51 5.55 164,422 0.57 5.49
1995-ILA Service units ..... 0.76 5.29 23,080 0.82 5.23
1994-ILA units ............. 0.35 4.01 559,470 0.43 3.93
1994-ILA Administration
units ................... 0.50 3.88 145,867 0.58 3.80
1994-ILA Service units ..... 0.75 3.61 21,862 0.83 3.53
1993-ILA units ............. 0.35 2.96 699,604 0.43 2.88
1993-ILA Administration
units ................... 0.50 2.81 150,452 0.58 2.73
1993-ILA Service units ..... 0.75 2.57 11,166 0.83 2.49
1992-ILA units ............. 0.35 3.68 884,571 0.43 3.60
1992-ILA Administration
units ................... 0.50 3.56 187,445 0.58 3.48
1992-ILA Service units ..... 0.75 3.58 15,114 0.83 3.50
1991-ILA units ............. 0.35 5.91 1,153,191 0.42 5.84
1991-ILA Administration
units ................... 0.50 5.74 210,330 0.57 5.67
1991-ILA Service units ..... 0.75 5.47 56,586 0.82 5.40
1990-ILA units ............. 0.35 7.93 924,141 0.40 7.88
1990-ILA Administration
units/(c)/............... 0.50/(b)/ 7.63/(b)/ 204,477 0.55/(b)/ 7.58/(b)/
1990-ILA Service units/(c)/. 0.75/(b)/ 7.46/(b)/ 38,128 0.80/(b)/ 7.41/(b)/
1989-ILA units ............. 0.35 8.85 1,295,389 0.40 8.80
1988-ILA units ............. 0.27 7.51 701,105 0.40 7.38
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 0.15/(b)/ 7.62/(b)/ 183,633 0.40/(b)/ 7.37/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (gain) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0504 $ 0.0001 $0.0505 $(0.0504) $1.00 5.15%
1996-ILA Administration
units ................... 1.00 0.0489 0.0001 0.0490 (0.0489) 1.00 4.99
1996-ILA Service units ..... 1.00 0.0463 0.0001 0.0464 (0.0463) 1.00 4.73
1995-ILA units ............. 1.00 0.0562 0.0002 0.0564 (0.0564) 1.00 5.77
1995-ILA Administration
units ................... 1.00 0.0549 0.0002 0.0551 (0.0551) 1.00 5.62
1995-ILA Service units ..... 1.00 0.0519 0.0002 0.0521 (0.0521) 1.00 5.35
1994-ILA units ............. 1.00 0.0378 0.0002 0.0380 (0.0380) 1.00 3.94
1994-ILA Administration
units ................... 1.00 0.0362 0.0002 0.0364 (0.0364) 1.00 3.79
1994-ILA Service units ..... 1.00 0.0350 0.0002 0.0352 (0.0352) 1.00 3.53
1993-ILA units ............. 1.00 0.0282 0.0008 0.0290 (0.0291) 1.00 2.94
1993-ILA Administration 1.00 0.0267 0.0008 0.0275 (0.0276) 1.00 2.79
units ...................
1993-ILA Service units ..... 1.00 0.0242 0.0006 0.0248 (0.0250) 1.00 2.53
1992-ILA units ............. 1.00 0.0338 0.0027 0.0365 (0.0364) 1.00 3.70
1992-ILA Administration
units ................... 1.00 0.0325 0.0027 0.0352 (0.0351) 1.00 3.55
1992-ILA Service units ..... 1.00 0.0309 0.0030 0.0339 (0.0336) 1.00 3.29
1991-ILA units ............. 1.00 0.0567 0.0011 0.0578 (0.0578) 1.00 5.91
1991-ILA Administration
units ................... 1.00 0.0545 0.0011 0.0556 (0.0556) 1.00 5.75
1991-ILA Service units ..... 1.00 0.0522 0.0011 0.0533 (0.0533) 1.00 5.49
1990-ILA units ............. 1.00 0.0779 0.0003 0.0782 (0.0782) 1.00 8.11
1990-ILA Administration
units (c)................ 1.00 0.0439 0.0004 0.0443 (0.0443) 1.00 7.74/(b)/
1990-ILA Service units (c).. 1.00 0.0359 0.0002 0.0361 (0.0363) 1.00 7.42/(b)/
1989-ILA units ............. 1.00 0.0877 0.0001 0.0878 (0.0878) 1.00 9.15
1988-ILA units ............. 1.00 0.0716 0.0002 0.0718 (0.0718) 1.00 7.42
1987-ILA units ............. 1.00 0.0622 0.0001 0.0623 (0.0624) 1.00 6.43
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.41% 5.04% $694,651 0.44% 5.01%
1996-ILA Administration
units ................... 0.56 4.89 36,055 0.59 4.86
1996-ILA Service units ..... 0.81 4.63 94,228 0.84 4.60
1995-ILA units ............. 0.41 5.62 570,469 0.43 5.60
1995-ILA Administration
units ................... 0.56 5.49 47,558 0.58 5.47
1995-ILA Service units ..... 0.81 5.19 85,401 0.83 5.17
1994-ILA units ............. 0.40 3.78 881,520 0.44 3.74
1994-ILA Administration
units ................... 0.55 3.62 95,483 0.59 3.58
1994-ILA Service units ..... 0.80 3.50 156,930 0.84 3.46
1993-ILA units ............. 0.40 2.82 1,315,378 0.43 2.79
1993-ILA Administration
units ................... 0.55 2.67 161,845 0.58 2.64
1993-ILA Service units ..... 0.80 2.42 101,272 0.83 2.39
1992-ILA units ............. 0.40 3.38 1,785,472 0.42 3.36
1992-ILA Administration
units ................... 0.55 3.25 461,542 0.57 3.23
1992-ILA Service units ..... 0.80 3.09 56,389 0.82 3.07
1991-ILA units ............. 0.40 5.67 2,103,627 0.43 5.64
1991-ILA Administration
units ................... 0.55 5.45 464,060 0.58 5.42
1991-ILA Service units ..... 0.80 5.22 200,176 0.83 5.19
1990-ILA units ............. 0.39 7.79 2,203,756 0.39 7.79
1990-ILA Administration
units (c)................ 0.55/(b) 7.49/(b)/ 296,313 0.55/(b)/ 7.49/(b)/
1990-ILA Service units (c).. 0.80/(b)/ 7.15/(b)/ 132,888 0.80/(b)/ 7.15/(b)/
1989-ILA units ............. 0.40 8.77 2,268,330 0.40 8.77
1988-ILA units ............. 0.40 7.16 2,197,796 0.40 7.16
1987-ILA units ............. 0.40 6.22 2,243,870 0.40 6.22
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end of Total
of period income transaction operation to unitholders period return/(a)/
====================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ............................. $1.00 $0.0498 $0.0002 $0.0500 $(0.0500) $1.00 5.11%
1996-ILA Administration units .............. 1.00 0.0483 0.0003 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..................... 1.00 0.0459 0.0001 0.0460 (0.0460) 1.00 4.69
1995-ILA units ............................. 1.00 0.0551 0.0007 0.0558 (0.0558) 1.00 5.73
1995-ILA Administration units .............. 1.00 0.0537 0.0007 0.0544 (0.0544) 1.00 5.57
1995-ILA Service units ..................... 1.00 0.0511 0.0007 0.0518 (0.0518) 1.00 5.31
1994-ILA units ............................. 1.00 0.0377 -- 0.0377 (0.0377) 1.00 3.91
1994-ILA Administration units .............. 1.00 0.0368 -- 0.0368 (0.0368) 1.00 3.75
1994-ILA Service units ..................... 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.49
1993-ILA units ............................. 1.00 0.0279 0.0006 0.0285 (0.0286) 1.00 2.89
1993-ILA Administration units .............. 1.00 0.0264 0.0006 0.0270 (0.0270) 1.00 2.74
1993-ILA Service units ..................... 1.00 0.0239 0.0006 0.0245 (0.0246) 1.00 2.48
1992-ILA units ............................. 1.00 0.0339 0.0025 0.0364 (0.0362) 1.00 3.65
1992-ILA Administration units .............. 1.00 0.0320 0.0023 0.0343 (0.0343) 1.00 3.49
1992-ILA Service units ..................... 1.00 0.0294 0.0024 0.0318 (0.0318) 1.00 3.23
1991-ILA units ............................. 1.00 0.0557 0.0018 0.0575 (0.0575) 1.00 5.90
1991-ILA Administration units .............. 1.00 0.0540 0.0018 0.0558 (0.0558) 1.00 5.74
1991-ILA Service units ..................... 1.00 0.0515 0.0018 0.0533 (0.0533) 1.00 5.48
1990-ILA units ............................. 1.00 0.0772 0.0002 0.0774 (0.0774) 1.00 8.05
1990-ILA Administration units /(c)/......... 1.00 0.0413 0.0002 0.0415 (0.0415) 1.00 7.67/(b)/
1990-ILA Service units /(c)/................ 1.00 0.0417 0.0003 0.0420 (0.0421) 1.00 7.42/(b)/
1989-ILA units ............................. 1.00 0.0864 0.0005 0.0869 (0.0869) 1.00 9.06
1988-ILA units ............................. 1.00 0.0704 0.0004 0.0708 (0.0708) 1.00 7.30
1987-ILA units ............................. 1.00 0.0617 0.0002 0.0619 (0.0619) 1.00 6.32
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
======================
Ratio Ratio of net Ratio of net
of net investment Net Ratio of net investment
expenses income to assets at expenses to income to
to average of average end of period average net average net
net assets net assets (in 000's) assets assets
=============================================================================
For the Years Ended December 31,
================================
1996-ILA units .................................. 0.41% 4.98% $574,734 0.43% 4.96%
1996-ILA Administration units ................... 0.56 4.83 108,850 0.58 4.81
1996-ILA Service units .......................... 0.81 4.59 123,483 0.83 4.57
1995-ILA units .................................. 0.41 5.51 711,209 0.43 5.49
1995-ILA Administration units ................... 0.56 5.37 92,643 0.58 5.35
1995-ILA Service units .......................... 0.81 5.11 119,692 0.83 5.09
1994-ILA units .................................. 0.40 3.77 713,816 0.44 3.73
1994-ILA Administration units ................... 0.55 3.68 97,626 0.59 3.64
1994-ILA Service units .......................... 0.80 3.40 108,972 0.84 3.35
1993-ILA units .................................. 0.40 2.79 969,565 0.43 2.76
1993-ILA Administration units ................... 0.55 2.64 121,327 0.58 2.61
1993-ILA Service units .......................... 0.80 2.39 185,506 0.83 2.36
1992-ILA units .................................. 0.40 3.39 1,328,036 0.43 3.36
1992-ILA Administration units ................... 0.55 3.20 152,804 0.58 3.17
1992-ILA Service units .......................... 0.80 2.94 183,208 0.83 2.91
1991-ILA units .................................. 0.40 5.57 1,709,321 0.43 5.54
1991-ILA Administration units ................... 0.55 5.40 146,795 0.58 5.37
1991-ILA Service units .......................... 0.80 5.15 154,419 0.83 5.12
1990-ILA units .................................. 0.39 7.72 1,816,991 0.39 7.72
1990-ILA Administration units /(c)/.............. 0.55/(b)/ 7.42/(b)/ 132,088 0.55/(b)/ 7.42/(b)/
1990-ILA Service units /(c)/..................... 0.80/(b)/ 7.11/(b)/ 148,323 0.80/(b)/ 7.11/(b)/
1989-ILA units .................................. 0.40 8.64 1,769,974 0.40 8.64
1988-ILA units .................................. 0.40 7.04 1,657,215 0.40 7.04
1987-ILA units .................................. 0.40 6.17 1,693,767 0.40 6.17
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
========================================
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total /(a)/
of period income transcations operations unitholders of period return
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0496 $0.0004 $0.0500 $(0.0500) $1.00 5.10%
1996-ILA Administration
units ................... 1.00 0.0482 0.0004 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..... 1.00 0.0456 0.0004 0.0460 (0.0460) 1.00 4.68
1995-ILA units ............. 1.00 0.0550 0.0006 0.0556 (0.0556) 1.00 5.70
1995-ILA Administration
units ................... 1.00 0.0534 0.0007 0.0541 (0.0540) 1.00 5.54
1995-ILA Service units ..... 1.00 0.0500 0.0005 0.0505 (0.0505) 1.00 5.28
1994-ILA units ............. 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 4.01
1994-ILA Administration
units ................... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 3.85
1994-ILA Service units ..... 1.00 0.0371 0.0001 0.0372 (0.0372) 1.00 3.59
1993-ILA units ............. 1.00 0.0288 0.0006 0.0294 (0.0294) 1.00 2.98
1993-ILA Administration
units ................... 1.00 0.0273 0.0006 0.0279 (0.0279) 1.00 2.83
1993-ILA Service units ..... 1.00 0.0248 0.0006 0.0254 (0.0254) 1.00 2.57
1992-ILA units ............. 1.00 0.0338 0.0012 0.0350 (0.0350) 1.00 3.54
1992-ILA Administration
units ................... 1.00 0.0326 0.0012 0.0338 (0.0338) 1.00 3.38
1992-ILA Service units ..... 1.00 0.0275 0.0011 0.0286 (0.0286) 1.00 3.13
For the Period January 30, 1991 (commencement of operations) through December 31,
=================================================================================
1991-ILA units ............. 1.00 0.0486 0.0013 0.0499 (0.0499) 1.00 5.75/(b)/
1991-ILA Administration
units /(c)/.............. 1.00 0.0210 0.0010 0.0220 (0.0220) 1.00 5.21/(b)/
1991-ILA Service units /(c)/ 1.00 0.0473 0.0009 0.0482 (0.0482) 1.00 5.33/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
====================================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
=============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.21% 4.96% $708,999 0.43% 4.74%
1996-ILA Administration
units ................... 0.36 4.82 137,706 0.58 4.60
1996-ILA Service units ..... 0.61 4.56 383,901 0.83 4.34
1995-ILA units ............. 0.21 5.50 586,294 0.44 5.27
1995-ILA Administration
units ................... 0.36 5.34 68,713 0.59 5.11
1995-ILA Service units ..... 0.61 5.00 123,254 0.84 4.77
1994-ILA units ............. 0.20 3.96 547,351 0.43 3.73
1994-ILA Administration
units ................... 0.35 3.97 64,388 0.58 3.74
1994-ILA Service units ..... 0.60 3.72 74,451 0.83 3.49
1993-ILA units ............. 0.20 2.88 456,411 0.44 2.64
1993-ILA Administration
units ................... 0.35 2.73 26,553 0.59 2.49
1993-ILA Service units ..... 0.60 2.48 34,014 0.84 2.24
1992-ILA units ............. 0.18 3.38 422,506 0.45 3.11
1992-ILA Administration
units ................... 0.33 3.26 6,915 0.60 2.99
1992-ILA Service units ..... 0.58 2.75 29,522 0.85 2.48
For the Period January 30, 1991 through December 31,
====================================================
1991-ILA units ............. 0.10/(b)/ 5.28/(b)/ 424,436 0.45/(b)/ 4.93/(b)/
1991-ILA Administration
units /(c)/.............. 0.25/(b)/ 4.77/(b)/ 17,649 0.60/(b)/ 4.42/(b)/
1991-ILA Service units /(c)/ 0.50/(b)/ 5.13/(b)/ 9,430 0.85/(b)/ 4.78/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during July and
January of 1991, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Net
asset Net realized Total
value at gain income Net asset
beginning Net on from Distributions value at
of investment investment investment to end Total
period income transactions operations unitholders of period return(a)
======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... $1.00 $0.0513 -- $0.0513 $(0.0513) $1.00 5.24%
1996-ILA Administration units......... 1.00 0.0498 -- 0.0498 (0.0498) 1.00 5.09
1996-ILA Service units ............... 1.00 0.0473 -- 0.0473 (0.0473) 1.00 4.83
1995-ILA units ....................... 1.00 0.0569 -- 0.0569 (0.0569) 1.00 5.83
1995-ILA Administration units ........ 1.00 0.0550 -- 0.0550 (0.0550) 1.00 5.67
1995-ILA Service units ............... 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.41
1994-ILA units ....................... 1.00 0.0407 -- 0.0407 (0.0407) 1.00 4.11
1994-ILA Administration units ........ 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.95
1994-ILA Service units ............... 1.00 0.0392 -- 0.0392 (0.0392) 1.00 3.69
1993-ILA units ....................... 1.00 0.0296 -- 0.0296 (0.0296) 1.00 3.00
1993-ILA Administration units ........ 1.00 0.0281 -- 0.0281 (0.0281) 1.00 2.84
1993-ILA Service units/(c)/........... 1.00 0.0157 -- 0.0157 (0.0157) 1.00 2.56/(b)/
1992-ILA units ....................... 1.00 0.0358 -- 0.0358 (0.0358) 1.00 3.61
1992-ILA Administration units ........ 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.46
1991-ILA units ....................... 1.00 0.0576 -- 0.0576 (0.0576) 1.00 5.94
1991-ILA Administration units ........ 1.00 0.0542 -- 0.0542 (0.0542) 1.00 5.78
1991-ILA Service units/(c)/........... 1.00 0.0196 -- 0.0196 (0.0196) 1.00 5.55/(b)/
1990-ILA units ....................... 1.00 0.0772 -- 0.0772 (0.0772) 1.00 8.06
1990-ILA Administration units/(d)/.... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 7.39/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 1.00 0.0516 -- 0.0516 (0.0516) 1.00 7.62(b)
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
====================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... 0.26% 5.13% $2,303,677 0.43% 4.96%
1996-ILA Administration units......... 0.41 4.98 794,537 0.58 4.81
1996-ILA Service units ............... 0.66 4.73 192,416 0.83 4.56
1995-ILA units ....................... 0.26 5.69 1,731,935 0.42 5.53
1995-ILA Administration units ........ 0.41 5.50 516,917 0.57 5.34
1995-ILA Service units ............... 0.66 5.22 102,576 0.82 5.06
1994-ILA units ....................... 0.25 4.07 1,625,567 0.42 3.90
1994-ILA Administration units ........ 0.40 3.88 329,896 0.57 3.71
1994-ILA Service units ............... 0.65 3.92 15,539 0.82 3.75
1993-ILA units ....................... 0.25 2.96 1,430,292 0.42 2.79
1993-ILA Administration units ........ 0.40 2.81 362,401 0.57 2.64
1993-ILA Service units/(c)/........... 0.65/(b)/ 2.54/(b)/ 1,425 0.82/(b)/ 2.37/(b)/
1992-ILA units ....................... 0.25 3.58 1,600,989 0.42 3.41
1992-ILA Administration units ........ 0.40 3.40 312,792 0.57 3.23
1991-ILA units ....................... 0.25 5.76 1,656,232 0.42 5.59
1991-ILA Administration units ........ 0.40 5.42 291,810 0.57 5.25
1991-ILA Service units/(c)/........... 0.65/(b)/ 5.56/(b)/ -- 0.82/(b)/ 5.39/(b)/
1990-ILA units ....................... 0.25 7.72 1,368,765 0.40 7.57
1990-ILA Administration units/(d)/.... 0.40/(b)/ 7.25/(b)/ 90,748 0.55/(b)/ 7.10/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 0.19/(b)/ 8.41/(b)/ 455,230 0.40/(b)/ 8.20/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Service unit activity commenced during April of 1991; no shares were
outstanding during the period from August 7, 1991 through May 15, 1993.
(d)ILA Administration unit activity commenced during September of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
======================================
Net
Net asset realized Total Net asset
value at Net gain(loss) income from value at
beginning investment on investment investment Distributions end of Total
of period income transactions operations to unitholders period return/(a)/
===============================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ..................... $1.00 $0.0320 $ $0.0320 $(0.0320) $1.00 3.25%
1996-ILA Administration units....... 1.00 0.0306 -- 0.0306 (0.0306) 1.00 3.09
1996-ILA Service units ............. 1.00 0.0279 -- 0.0279 (0.0279) 1.00 2.84
1995-ILA units ..................... 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.72
1995-ILA Administration units....... 1.00 0.0351 -- 0.0351 (0.0352) 1.00 3.57
1995-ILA Service units ............. 1.00 0.0324 -- 0.0324 (0.0325) 1.00 3.31
1994-ILA units ..................... 1.00 0.0264 -- 0.0264 (0.0264) 1.00 2.71
1994-ILA Administration units....... 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.55
1994-ILA Service units ............. 1.00 0.0220 -- 0.0220 (0.0220) 1.00 2.30
1993-ILA units ..................... 1.00 0.0222 -- 0.0222 (0.0222) 1.00 2.25
1993-ILA Administration units....... 1.00 0.0207 -- 0.0207 (0.0207) 1.00 2.09
1993-ILA Service units ............. 1.00 0.0183 -- 0.0183 (0.0183) 1.00 1.84
1992-ILA units ..................... 1.00 0.0277 -- 0.0277 (0.0277) 1.00 2.82
1992-ILA Administration units....... 1.00 0.0266 -- 0.0266 (0.0266) 1.00 2.67
1992-ILA Service units ............. 1.00 0.0243 -- 0.0243 (0.0243) 1.00 2.41
1991-ILA units ..................... 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.33
1991-ILA Administration units....... 1.00 0.0406 -- 0.0406 (0.0406) 1.00 4.17
1991-ILA Service units ............. 1.00 0.0386 -- 0.0386 (0.0386) 1.00 3.91
1990-ILA units ..................... 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00 5.64
1990-ILA Administration units /(c)/. 1.00 0.0301 -- 0.0301 (0.0300) 1.00 5.43/(b)/
1990-ILA Service units /(c)/........ 1.00 0.0259 -- 0.0259 (0.0259) 1.00 5.17/(b)/
1989-ILA units ..................... 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00 6.07
1988-ILA units ..................... 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00 5.03
1987-ILA units ..................... 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00 4.23
<CAPTION>
Ratio assuming no
waiver of fees and no
expense limitation
==============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C>
1996-ILA units ..................... 0.31% 3.20% $1,514,443 0.41% 3.10%
1996-ILA Administration units....... 0.46 3.06 59,097 0.56 2.96
1996-ILA Service units ............. 0.71 2.79 28,921 0.81 2.69
1995-ILA units ..................... 0.31 3.65 $1,342,585 0.42 3.54
1995-ILA Administration units....... 0.46 3.51 48,773 0.57 3.40
1995-ILA Service units ............. 0.71 3.24 49,647 0.82 3.13
1994-ILA units ..................... 0.30 2.64 1,434,965 0.41 2.53
1994-ILA Administration units....... 0.45 2.50 97,778 0.56 2.39
1994-ILA Service units ............. 0.70 2.20 36,492 0.81 2.09
1993-ILA units ..................... 0.30 2.22 1,769,477 0.41 2.11
1993-ILA Administration units....... 0.45 2.08 99,896 0.56 1.97
1993-ILA Service units ............. 0.70 1.83 45,172 0.81 1.72
1992-ILA units ..................... 0.30 2.77 1,333,925 0.42 2.65
1992-ILA Administration units....... 0.45 2.66 50,225 0.57 2.54
1992-ILA Service units ............. 0.70 2.43 29,534 0.82 2.31
1991-ILA units ..................... 0.32 4.24 1,044,986 0.42 4.14
1991-ILA Administration units....... 0.47 4.06 37,567 0.57 3.96
1991-ILA Service units ............. 0.72 3.86 52,399 0.82 3.76
1990-ILA units ..................... 0.40 5.50 603,895 0.40 5.50
1990-ILA Administration units /(c)/. 0.55/(b)/ 5.40/(b)/ 42,498 0.55/(b)/ 5.40/(b)/
1990-ILA Service units /(c)/........ 0.80/(b)/ 5.16/(b)/ 56,810 0.80/(b)/ 5.16/(b)/
1989-ILA units ..................... 0.40 5.91 688,556 0.40 5.91
1988-ILA units ..................... 0.40 4.87 907,782 0.40 4.87
1987-ILA units ..................... 0.40 4.13 965,714 0.40 4.13
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (loss) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. $1.00 $0.0299 -- $0.0299 $(0.0299) $1.00 3.03%
1996-ILA Administration
units ................... 1.00 0.0284 -- 0.0284 (0.0284) 1.00 2.88
1995-ILA units ............. 1.00 0.0349 -- 0.0349 (0.0350) 1.00 3.55
1995-ILA Administration
units ................... 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.40
1994-ILA units ............. 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.53
1994-ILA Administration
units ................... 1.00 0.0233 -- 0.0233 (0.0233) 1.00 2.37
1993-ILA units ............. 1.00 0.0206 -- 0.0206 (0.0206) 1.00 2.09
1993-ILA Administration
units ................... 1.00 0.0191 -- 0.0191 (0.0191) 1.00 1.93
1993-ILA Service units ..... 1.00 0.0166 -- 0.0166 (0.0166) 1.00 1.68
1992-ILA units ............. 1.00 0.0256 (0.0001) 0.0255 (0.0256) 1.00 2.62
1992-ILA Administration
units ................... 1.00 0.0235 (0.0002) 0.0233 (0.0235) 1.00 2.47
1992-ILA Service units (c).. 1.00 0.0081 -- 0.0081 (0.0081) 1.00 1.99/(b)/
1991-ILA units ............. 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.92
1991-ILA Administration
units ................... 1.00 0.0376 -- 0.0376 (0.0376) 1.00 3.80
1990-ILA units ............. 1.00 0.0511 (0.0001) 0.0510 (0.0511) 1.00 5.24
1990-ILA Administration
units (c)................ 1.00 0.0042 -- 0.0042 (0.0042) 1.00 5.14/(b)/
1989-ILA units ............. 1.00 0.0573 (0.0001) 0.0572 (0.0572) 1.00 5.93
For the Period October 3, 1988 (commencement of operations) through
December 31,
=========================================================
1988-ILA units ............. 1.00 0.0139 -- 0.0139 (0.0139) 1.00 5.81/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. 0.41% 2.99% $440,476 0.42% 2.98%
1996-ILA Administration
units ................... 0.56 2.84 142 0.57 2.83
1995-ILA units ............. 0.41 3.49 346,728 0.41 3.49
1995-ILA Administration
units ................... 0.56 3.32 61 0.56 3.32
1994-ILA units ............. 0.40 2.50 227,399 0.41 2.49
1994-ILA Administration
units ................... 0.55 2.33 790 0.56 2.32
1993-ILA units ............. 0.40 2.06 229,839 0.44 2.02
1993-ILA Administration
units ................... 0.55 1.91 1,425 0.59 1.87
1993-ILA Service units ..... 0.76 1.66 -- 0.84 1.54
1992-ILA units ............. 0.40 2.56 161,868 0.47 2.49
1992-ILA Administration
units ................... 0.55 2.35 31 0.62 2.28
1992-ILA Service units (c).. 0.80/(b)/ 3 0.87/(b)/ 1.96/(b)/
2.03(b)
1991-ILA units ............. 0.40 3.88 102,494 0.47 3.81
1991-ILA Administration
units ................... 0.55 3.76 13 0.62 3.69
1990-ILA units ............. 0.40 5.11 106,972 0.40 5.11
1990-ILA Administration
units (c)................ 0.55/(b)/ 5.33(b) 68 0.55/(b)/ 5.33/(b)/
1989-ILA units ............. 0.40 5.73 112,463 0.40 5.73
For the Period October 3, 1988 (commencement of
operations) through December 31,
=========================================================
1988-ILA units ............. 0.24/(b)/ 5.74/(b)/ 41,028 0.38/(b)/ 5.60/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during December of
1990 and August of 1992, respectively. No service shares were outstanding
for the years ended December 31, 1996, 1995, 1994.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
----------------------------------------
Net asset Net realized Total Net asset
value at Net loss income from value at
beginning investment on investment investment Distribution end Total
of period income transactions operations to unitholders of period return(a)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... $1.00 $0.0301 -- $0.0301 $(0.0301) $1.00 3.05%
1996-ILA Administration units ...... 1.00 0.0288 -- 0.0288 (0.0288) 1.00 2.90
1995-ILA units ..................... 1.00 0.0344 -- 0.0344 (0.0344) 1.00 3.51
1995-ILA Administration units ...... 1.00 0.0328 -- 0.0328 (0.0328) 1.00 3.35
1994-ILA units ..................... 1.00 0.0262 -- 0.0262 (0.0262) 1.00 2.56
1994-ILA Administration units ...... 1.00 0.0247 -- 0.0247 (0.0247) 1.00 2.41
1993-ILA units ..................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00 2.21
1993-ILA Administration units ...... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 2.05
1992-ILA units ..................... 1.00 0.0265 -- 0.0265 (0.0265) 1.00 2.71
1992-ILA Administration units ...... 1.00 0.0253 -- 0.0253 (0.0253) 1.00 2.55
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 1.00 0.0347 (0.0002) 0.0345 (0.0347) 1.00 4.02/(b)/
1991-ILA Administration units /(c)/. 1.00 0.0330 -- 0.0330 (0.0330) 1.00 3.87/(b)/
- --------------------
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... 0.32% 3.01% $70,175 0.43% 2.90%
1996-ILA Administration units ...... 0.47 2.88 44,319 0.58 2.77
1995-ILA units ..................... 0.30 3.44 90,537 0.44 3.30
1995-ILA Administration units ...... 0.45 3.28 26,724 0.59 3.14
1994-ILA units ..................... 0.24 2.62 84,517 0.47 2.39
1994-ILA Administration units ...... 0.39 2.47 38,970 0.62 2.24
1993-ILA units ..................... 0.10 2.21 48,367 0.51 1.80
1993-ILA Administration units ...... 0.25 2.05 20,306 0.66 1.64
1992-ILA units ..................... 0.10 2.65 16,844 0.57 2.18
1992-ILA Administration units ...... 0.25 2.53 14,641 0.72 2.06
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 0.10/(b)/ 3.96/(b)/ 11,070 0.76/(b)/ 3.30/(b)/
1991-ILA Administration units/(c)/.. 0.25/(b)/ 3.90/(b)/ 19,198 0.91/(b)/ 3.24/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration unit activity commenced during February of 1991.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Unitholders and Board of Trustees of Goldman Sachs Money Market
Trust--Institutional Liquid Assets:
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Money Market Trust--Institutional Liquid Assets (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Government,
Treasury Obligations, Treasury Instruments, Federal, Tax-Exempt Diversified,
Tax-Exempt California and Tax-Exempt New York Portfolios), including the
statements of investments as of December 31, 1996, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Institutional Liquid Assets as of December 31, 1996, the results
of their operations for the year then ended, the changes in their net assets and
the financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- -------------------------------------- ----------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- -----------------------------------------
[This page intentionally left blank]
- -------------------------------------- -----------------------------------------
45
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------ -----------------------------------------
[This page intentionally left blank]
- ------------------------------------ -----------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market
Trust--Institutional Liquid Assets Portfolios' Prospectus which contains facts
concerning each Fund's objectives and policies, management, expenses and other
information.
- --------------------------------------------------------------------------------
47
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Institutional
Liquid Assets
- --------------------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Portfolio
Money Market Portfolio
Government Portfolio
Treasury Obligations Portfolio
Treasury Instruments Portfolio
Federal Portfolio
Tax-Exempt Diversified Portfolio
Tax-Exempt California Portfolio
Tax-Exempt New York Portfolio
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories.
The modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term debt
obligations. Prime-1 or P-1 repayment ability will often be evidenced by many of
the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-1
<PAGE>
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG to reflect such characteristics as payment upon periodic demand rather than
fixed maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the
A-2
<PAGE>
obligor's capacity to meet its financial commitment on the obligation is still
strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the
addition of a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for
A-3
<PAGE>
bonds to denote the long-term maturity and the commercial paper rating symbols
for the put option (for example, "AAA/A-1+"). With short-term demand debt,
S&P's note rating symbols are used with the commercial paper rating symbols (for
example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: The highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and -, in the AA and A categories for
long-term fixed income securities. The modifier + indicates that the security
ranks in the higher end of the category: the modifier AA or A indicates a mid-
range ranking; and the modifier - indicates that the issue ranks in the lower
end of the category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for short-term debt. The rating D-1+ indicates
that the security has the highest certainty of timely payment, short-term
liquidity is clearly 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.
A-4
<PAGE>
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay its obligations, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
A: Bonds which are rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories
to indicate the relative position of a credit within the rating category.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity
for timely repayment. Where issues possess a particularly strong credit feature
a rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
A-5
<PAGE>
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates an extremely high ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk,
compared to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
/1/ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these
securities on the date of the Portfolios' taxable year end.
A-6
<PAGE>
GOLDMAN SACHS MONEY MARKET FUNDS
GOLDMAN SACHS--INSTITUTIONAL LIQUID ASSETS
4900 Sears Tower
Chicago, Illinois 60606
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STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1997
ILA SERVICE UNITS
ILA CLASS B UNITS
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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 Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, Service Organizations, as defined below, will be assigned
an Account 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
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account information. The AA can also answer inquiries about rates of return and
portfolio composition/ holdings, and guide Service Organizations through
operational details. A Goldman Sachs client can also utilize the SMART personal
computer software system which allows Service Organizations to purchase and
redeem units and also obtain Portfolio and account information directly.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with each Prospectus relating to the ILA Service Units 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.
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TABLE OF CONTENTS
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Page in
Statement of
Additional
Information
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Investment Policies and
Practices of the Portfolios...... 4
Investment Limitations........... 43
Trustees and Officers............ 46
The Adviser, Distributor and
Transfer Agent................... 52
Portfolio Transactions........... 58
Net Asset Value.................. 60
Redemptions...................... 62
Calculation of Yield Quotations.. 62
Tax Information.................. 67
Organization and Capitalization.. 73
Custodian and Subcustodian....... 79
Independent Accountants.......... 79
Financial Statements............. 79
Service and Distribution Plans... 80
Appendix A (Description of
Securities Ratings).............. A-1
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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 specific merchandise, which
are "accepted" by a bank, meaning, in
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effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity. Fixed time deposits are bank obligations payable at a
stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits. Bank notes and bankers'
acceptances rank junior to domestic deposit liabilities of the bank and pari
passu with other senior, unsecured obligations of the bank. Bank notes are not
insured by the Federal Deposit Insurance Corporation or any other insurer.
Deposit notes are insured by the Federal Deposit Insurance Corporation only to
the extent of $100,000 per depositor per bank.
The Prime Obligations Portfolio and Money Market Portfolio may invest
in short-term funding agreements. A funding agreement is a contract between an
issuer and a purchaser that obligates the issuer to pay a guaranteed rate of
interest on a principal sum deposited by the purchaser. Funding agreements will
also guarantee the return of principal and may guarantee a stream of payments
over time. A funding agreement has a fixed maturity date and may have either a
fixed or variable interest rate that is based on an index and guaranteed for a
set time period. Because there is no secondary market for these investments,
any such funding agreement purchased by a Portfolio will be regarded as
illiquid.
REPURCHASE AGREEMENTS
Each Portfolio (other than the Treasury Instruments Portfolio) may
enter into repurchase agreements only with primary dealers in U.S. Government
Securities. A repurchase agreement is an arrangement under which the purchaser
(i.e., the Portfolio) purchases a U.S. Government security or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time and price.
Custody of the Obligation will be maintained by the Portfolios'
custodian or subcustodian. The repurchase price may be higher than the purchase
price, the difference being income to the Portfolio, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Portfolio together with the repurchase price on repurchase. In either case, the
income to the Portfolio is unrelated to the interest rate on the Obligation
subject to the repurchase agreement.
Repurchase agreements pose certain risks for all entities, including
the Portfolios, that utilize them. Such risks are not unique to the Portfolios
but are inherent in repurchase agreements. The Portfolios seek to minimize such
risks by, among others, the means indicated below, but because of the inherent
legal
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uncertainties involved in repurchase agreements, such risks cannot be
eliminated.
For purposes of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and generally, for tax purposes, a repurchase
agreement is deemed to be a loan from the Portfolio to the seller of the
Obligation. It is not clear whether for other purposes a court would consider
the Obligation purchased by the Portfolio subject to a repurchase agreement as
being owned by the Portfolio or as being collateral for a loan by the Portfolio
to the seller.
If in the event of bankruptcy or insolvency proceedings against the
seller of the Obligation, a court holds that the Portfolio does not have a
perfected security interest in the Obligation, the Portfolio may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Portfolio would be at risk
of losing some or all of the principal and income involved in the transaction.
To minimize this risk, the Portfolios utilize custodians and subcustodians that
the Adviser believes follow 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, each Portfolio (other than the Treasury Instruments
Portfolio), together with other registered investment companies having advisory
agreements with the Adviser or any of its affiliates, may transfer uninvested
cash balances into a single joint account, the daily aggregate balance of which
will be invested in one or more repurchase agreements.
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FOREIGN SECURITIES
The Money Market Portfolio may invest in foreign securities and in
certificates of deposit, bankers' acceptances and fixed time deposits and other
obligations issued by major foreign banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios may also
invest in municipal instruments backed by letters of credit issued by certain of
such banks. Under current Securities and Exchange Commission ("SEC") rules
relating to the use of the amortized cost method of portfolio securities
valuation, the Money Market Portfolio is restricted to purchasing U.S. dollar
denominated securities, but it is not otherwise precluded from purchasing
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 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
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these and other types of asset-backed securities that may be developed in the
future. This Statement of Additional Information will be amended or supplemented
as necessary to reflect the Prime Obligations and Money Market Portfolios'
intention to invest in asset-backed securities with characteristics that are
materially different from the securities described in the preceding paragraph.
However, a Portfolio will generally not invest in an asset-backed security if
the income received with respect to its investment constitutes rental income or
other income not treated as qualifying income under the 90% test described in
"Tax Information" below. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments in response to interest rate fluctuations.
As set forth below, several types of asset-backed and receivables-
backed securities have already been offered to investors, including for example,
Certificates for Automobile Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented
by mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection, and (ii) protection against losses
resulting from ultimate default
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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 trans-actions are negotiated directly
with the other party, and such commitments are not traded on exchanges, but may
be traded over-the-counter.
A Portfolio will purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Portfolio may dispose of or negotiate a commitment after entering into it. A
Portfolio also may sell securities it has committed to purchase before those
securities are delivered to the Portfolio on the settlement date. The Portfolio
may realize a capital gain or loss in connection with these transactions;
distributions from any net capital gains would be taxable to its unitholders.
For purposes of determining a Portfolio's average dollar weighted maturity, the
maturity of when-issued or forward commitment securities will be calculated from
the commitment date.
When a Portfolio purchases securities on a when-issued or forward
commitment basis, the Portfolio's custodian or subcustodian will maintain in a
segregated account cash or liquid assets having a value (determined daily) at
least equal to the amount of the Portfolio's purchase commitments. In the case
of a forward
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commitment to sell portfolio securities subject to such commitment, the
custodian or subcustodian will hold the portfolio securities in a segregated
account while the commitment is outstanding. These procedures are designed to
ensure that the Portfolio will maintain sufficient assets at all times to cover
its obligations under when-issued purchases and forward commitments.
VARIABLE AMOUNT MASTER DEMAND NOTES
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable amount master demand
notes. These obligations permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between a Portfolio,
as lender, and the borrower. Variable amount master demand notes are direct
lending arrangements between the lender and borrower and are not generally
transferable, nor are they ordinarily rated. A Portfolio may invest in them
only if the Adviser believes that the notes are of comparable quality to the
other obligations in which that Portfolio may invest.
VARIABLE RATE AND FLOATING RATE DEMAND INSTRUMENTS
Each Portfolio (other than the Treasury Obligations, Federal and
Treasury Instruments Portfolios) may purchase variable and floating rate demand
instruments that are tax exempt municipal obligations or other debt securities
that possess a floating or variable interest rate adjustment formula. These
instruments permit a Portfolio to demand payment of the principal balance plus
unpaid accrued interest upon a specified number of days' notice to the issuer or
its agent. The demand feature may be backed by a bank letter of credit or
guarantee issued with respect to such instrument.
The terms of the variable or floating rate demand instruments that a
Portfolio may purchase provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon current
market levels, the prime rate of a bank or other appropriate interest rate
adjustment index as provided in the respective instruments. Some of these
instruments are payable on demand on a daily basis or on not more than seven
days' notice. Others, such as instruments with quarterly or semiannual
interest rate adjustments, may be put back to the issuer on designated days on
not more than thirty days' notice. Still others are automatically called by the
issuer unless the Portfolio instructs otherwise. The Trust, on behalf of the
Portfolios, intends to exercise the demand only (1) upon a default under the
terms of the debt security, (2) as needed to provide liquidity to a Portfolio,
(3) to maintain the respective quality standards of a Portfolio's investment
portfolio, or (4) to attain a more optimal portfolio structure. A Portfolio
will determine the variable or floating rate demand instruments that it will
purchase in accordance with procedures approved by the Trustees to minimize
credit risks. To be eligible for purchase by a Portfolio, a variable or
floating rate demand instrument which is unrated must have high quality
characteristics similar to other obligations in
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which the Portfolio may invest. The Adviser may determine that an unrated
variable or floating rate demand instrument meets a Portfolio's quality criteria
by reason of being backed by a letter of credit or guarantee issued by a bank
that meets the quality criteria for the Portfolio. Thus, either the credit of
the issuer of the obligation or the guarantor bank or both will meet the quality
standards of the Portfolio.
The maturity of the variable or floating rate demand instruments held
by a Portfolio will ordinarily be deemed to be the longer of (1) the notice
period required before the Portfolio is entitled to receive payment of the
principal amount of the instrument or (2) the period remaining until the
instrument's next interest rate adjustment. The acquisition of variable or
floating rate demand notes for a Portfolio must also meet the requirements of
rules issued by the SEC applicable to the use of the amortized cost method of
securities valuation. The Portfolios will also consider the liquidity of the
market for variable and floating rate instruments, and in the event that such
instruments are illiquid, the Portfolios' investments in such instruments will
be subject to the limitation on illiquid investments.
A Portfolio (other than Treasury Obligations Portfolio, Treasury
Instruments Portfolio, Government Portfolio and Federal Portfolio) may invest in
participation interests in variable or floating rate tax-exempt obligations held
by financial institutions (usually commercial banks). Such participation
interests provide the Portfolio with a specific undivided interest (up to 100%)
in the underlying obligation and the right to demand payment of its proportional
interest in the unpaid principal balance plus accrued interest from the
financial institution upon a specific number of day's notice. In addition, the
participation interest generally is backed by an irrevocable letter of credit or
guarantee from the institution. The financial institution usually is entitled
to a fee for servicing the obligation and providing the letter of credit.
RESTRICTED AND OTHER ILLIQUID SECURITIES
A Portfolio may purchase securities that are not registered
("restricted securities") under the Securities Act of 1933 (the "1933 Act"),
including restricted securities that can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act. However, a Portfolio
will not invest more than 10% of the value of its net assets in securities which
are illiquid, which includes fixed time deposits and repurchase agreements
maturing in more than seven days that cannot be traded on a secondary market and
restricted securities, unless, in the case of restricted securities, the
Trust's Board of Trustees determines, based upon a continuing review of the
trading markets for the specific restricted security, that such restricted
securities are liquid. The Board of Trustees may adopt guidelines and delegate
to the Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board, however, will retain sufficient oversight and
be ultimately responsible for the
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determinations. Since it is not possible to predict with assurance that the
market for securities eligible for resale under Rule 144A will continue to be
liquid, the Board will carefully monitor each Portfolio's investments in these
securities, focusing on such important factors, among others, as valuation,
liquidity and availability of information. This investment practice could have
the effect of increasing the level of illiquidity in a Portfolio to the extent
that qualified institutional buyers become for a time uninterested in purchasing
these restricted securities.
MUNICIPAL OBLIGATIONS
The Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios may invest in municipal
obligations. Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies, authorities and instrumentalities and the District of
Columbia to obtain funds for various public purposes. The interest on most of
these obligations is generally exempt from regular federal income tax. The two
principal classifications of municipal obligations are "notes" and "bonds".
Notes. Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less. Municipal
notes include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue 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 Portfolios which invest in municipal obligations may also acquire
securities in the form of custodial receipts which evidence ownership of future
interest payments, principal payments or both on certain state and local
governmental and authority obligations when, in the opinion of bond counsel,
interest payments with respect to such custodial receipts are excluded from
gross income for federal income tax purposes, and in the case of the Tax-Exempt
California and Tax-Exempt New York Portfolios, exempt from California and New
York (city and state) personal income taxes, respectively. Such obligations are
held in custody by a bank on behalf of the holders of the receipts. These
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custodial receipts are known by various names, including "Municipal Receipts"
("MRs") and "Municipal Certificates of Accrual on Tax-Exempt Securities" ("M-
CATS"). There are a number of other types of notes issued for different
purposes and secured differently from those described above.
Bonds. Municipal bonds, which generally meet longer term capital
needs and have maturities of more than one year when issued, have two principal
classifications, "general obligation" bonds and "revenue" bonds.
General obligation bonds are issued by entities such as states,
counties, cities, towns and regional districts and are used to fund a wide range
of public projects including the construction or improvement of schools,
highways and roads, water and sewer systems and a variety of other public
purposes. The basic security of general obligation bonds is the issuer's
pledge of its faith, credit, and taxing power for the payment of principal and
interest. The taxes that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount or special assessments.
Revenue bonds have been issued to fund a wide variety of capital
projects including: electric, gas, water and sewer systems; highways, bridges
and tunnels; port and airport facilities; colleges and universities; and
hospitals. The principal security for a revenue bond is generally the net
revenues derived from a particular facility or group of facilities or, in some
cases, from the proceeds of a special excise or other specific revenue source.
Although the principal security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund whose monies may
also be used to make principal and interest payments on the issuer's
obligations. Housing finance authorities have a wide range of security
including partially or fully insured, rent subsidized and/or collateralized
mortgages, and/or the net revenues from housing or other public projects. In
addition to a debt service reserve fund, some authorities provide further
security in the form of a state's ability (without obligation) to make up
deficiencies in the debt service reserve fund. Lease rental revenue bonds
issued by a state or local authority for capital projects are secured by annual
lease rental payments from the state or locality to the authority sufficient to
cover debt service on the authority's obligations.
Private activity bonds (a term that includes certain types of bonds
the proceeds of which are used to a specified extent for the benefit of persons
other than governmental units), although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. The Tax-Exempt Diversified Portfolio and the Tax-Exempt
California Portfolio do not intend to invest in private activity bonds if the
interest from such bonds would be an item of tax preference to unitholders under
the federal alternative minimum tax.
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Municipal bonds with a series of maturity dates are called serial
bonds. The serial bonds which the Portfolios may purchase are limited to short-
term serial bonds---those with original or remaining maturities of thirteen
months or less. The Portfolios may purchase long-term bonds provided that they
have a remaining maturity of thirteen months or less or, in the case of bonds
called for redemption, the date on which the redemption payment must be made is
within thirteen months. The Portfolios may also purchase long-term bonds
(sometimes referred to as "Put Bonds"), which are subject to a Portfolio's
commitment to put the bond back to the issuer at par at a designated time within
thirteen months and the issuer's commitment to so purchase the bond at such
price and time.
The Portfolios which invest in municipal obligations may invest in
tender option bonds. A tender option bond is a municipal obligation (generally
held pursuant to a custodian arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates. The bond is typically issued in conjunction with the
agreement of a third party, such as a bank, broker-dealer or other financial
institutions, pursuant to which such institution grants the security holder the
option, at periodic intervals, to tender its securities to the institution and
receive the face value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
bond's fixed coupon rate and the rate, as determined by a remarketing or similar
agent at or near the commencement of such period, that would cause the bond,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term, tax-
exempt rate. However, an institution will not be obligated to accept tendered
bonds in the event of certain defaults by, or a significant downgrading in the
credit rating assigned to, the issuer of the bond.
The tender option will be taken into consideration in determining the
maturity of tender option bonds and the average portfolio maturity of a
Portfolio. The liquidity of a tender option bond is a function of the credit
quality of both the bond issuer and the financial institution providing
liquidity. Consequently, tender option bonds are deemed to be liquid unless, in
the opinion of the Adviser, the credit quality of the bond issuer and the
financial institution is deemed, in light of the relevant Portfolio's credit
quality requirements, to be inadequate.
Although the Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York Portfolios intend to invest in tender option bonds the interest
on which will, in the opinion of counsel for the issuer and sponsor or counsel
selected by the Adviser, be excluded from gross income for federal income tax
purposes, there is no assurance that the Internal Revenue Service will agree
with such counsel's opinion in any particular case. Consequently, there is a
risk that a Portfolio will not be considered the owner of such
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tender option bonds and thus will not be entitled to treat such interest as
exempt from such tax. A similar risk exists for certain other investments
subject to puts or similar rights. Additionally, the federal income tax
treatment of certain other aspects of these investments, including the proper
tax treatment of tender options and the associated fees, in relation to various
regulated investment company tax provisions is unclear. The Tax-Exempt
Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios intend to
manage their respective portfolios in a manner designed to eliminate or minimize
any adverse impact from the tax rules applicable to these investments.
In addition to general obligation bonds, revenue bonds and serial
bonds, there are a variety of hybrid and special types of municipal obligations
as well as numerous differences in the security of municipal obligations both
within and between the two principal classifications above.
The Tax-Exempt Diversified, Tax-Exempt California and Tax-Exempt New
York Portfolios may purchase municipal instruments that are backed by letters of
credit issued by foreign banks that have a branch, agency or subsidiary in the
United States. Such letters of credit, like other obligations of foreign banks,
may involve credit risks in addition to those of domestic obligations, including
risks relating to future political and economic developments, nationalization,
foreign governmental restrictions such as exchange controls and difficulties in
obtaining or enforcing a judgment against a foreign bank (including branches).
For the purpose of investment restrictions of the Portfolios, the
identification of the "issuer" of municipal obligations that are not general
obligation bonds is made by the Adviser on the basis of the characteristics of
the obligation as described above, the most significant of which is the source
of funds for the payment of principal of and interest on such obligations.
An entire issue of municipal obligations may be purchased by one or a
small number of institutional investors such as one of the Portfolios. Thus,
the issue may not be said to be publicly offered. Unlike securities which must
be registered under the Securities Act of 1933 prior to offer and sale,
municipal obligations which are not publicly offered may nevertheless be readily
marketable.
Municipal obligations purchased for a Portfolio may be subject to the
Portfolio's policy on holdings of illiquid securities. The Adviser determines
whether a municipal obligation is liquid based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The Adviser believes that the quality standards applicable to each Portfolio's
investments enhance liquidity. In addition, stand-by commitments and demand
obligations also enhance liquidity.
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Yields on municipal obligations depend on a variety of factors,
including money market conditions, municipal bond market conditions, the size of
a particular offering, the maturity of the obligation and the quality of the
issue. High quality municipal obligations tend to have a lower yield than lower
rated obligations. Municipal obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or municipalities to levy taxes. There is also the
possibility that as a result of litigation or other conditions the power or
ability of any one or more issuers to pay when due principal of and interest on
its or their municipal obligations may be materially affected.
INVESTING IN CALIFORNIA
The financial condition of the State of California ("California"), its
public authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per unit and the interest
income of, the Tax-Exempt California Portfolio, or result in the default of
existing obligations, including obligations which may be held by the Tax-Exempt
California Portfolio. The following section provides only a brief summary of
the complex factors affecting the financial condition of California, and is
based on information obtained from California, as publicly available prior to
the date of this Statement of Additional Information. The information contained
in such publicly available documents has not been independently verified. It
should be noted that the creditworthiness of obligations issued by local issuers
may be unrelated to the creditworthiness of California, and that there is no
obligation on the part of California to make payment on such local obligations
in the event of default in the absence of a specific guarantee or pledge
provided by California.
During the early 1990's, California experienced significant financial
difficulties, which reduced its credit standing, but the State's finances have
improved since 1995. The ratings of certain related debt of other issuers for
which California has an outstanding lease purchase, guarantee or other
contractual obligation (such as for state-insured hospital bonds) are generally
linked directly to California's rating. Should the financial condition of
California deteriorate again, its credit ratings could be further reduced, and
the market value and marketability of all outstanding notes and bonds issued by
California, its public authorities or local governments could be adversely
affected.
Economic Factors. California's economy is the largest among the 50
----------------
states (accounting for almost 13% of the nation's output of goods and services)
and one of the largest in the world. California's population of more than 32.6
million represents over 12% of the total United States population and grew by
27% in the
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1980s. While California's substantial population growth during the 1980's
stimulated local economic growth and diversification and sustained a real estate
boom between 1984 and 1990, it increased strains on California's limited water
resources and demands for government services. Population growth slowed since
1991 even while substantial immigration has continued, due to a significant
increase in outmigration by California residents. However, with the California
economy improving, the recent net outmigration within the Continental U.S. is
expected to decrease or be reversed.
From mid-1990 to late 1993, California's economy suffered its worst
recession since the 1930s, with over 700,000 jobs lost. The largest job losses
were in Southern California, led by declines in the aerospace and construction
industries. Significantly related to cuts in lost federal defense spending.
Since the start of 1994, the California economy has been in a steady
recovery in all parts of the State. The State Department of Finance reports net
job growth, particularly in construction and related manufacturing, wholesale
and retail trade, electronics, exports, transportation, recreation and services.
This growth has offset the continuing but slowing job losses in the aerospace
industry and restructuring of the finance and utility sectors. Prerecession job
levels were reached in 1996. Unemployment in California is down more than three
percent from its 10% peak in January, 1994, but still remains higher than the
national average rate.
Constitutional Limitations on Taxes, Other Changes and Appropriations
- ---------------------------------------------------------------------
Limitations on Property Taxes. Certain California Instruments may
-----------------------------
be obligations of issuers which rely in whole or in part, directly or
indirectly, on ad valorem property taxes as a source of revenue. The taxing
power of California local governments and districts is limited by Article XIIIA
of the California constitution, also known as "Proposition 13." Briefly, Article
XIIIA limits to 1% of full cash value the rate of ad valorem property taxes on
real property and generally restricts the reassessment of property to 2% per
year, except upon new construction or change of ownership (subject to a number
of exemptions). Taxing entities may, however, raise ad valorem taxes above the
1% limit to pay debt service on voter-approved bonded indebtedness.
Under Article XIIIA, the basic 1% ad valorem tax levy is applied
against the assessed value of property as of the owner's date of acquisition (or
as of March 1, 1975, if acquired earlier), subject to certain adjustments. This
system has resulted in widely varying amounts of tax on similarly situated
properties. Several lawsuits have been filed challenging the acquisition-based
assessment system of Proposition 13, and on June 18, 1992 the U.S. Supreme Court
announced a decision upholding Proposition 13.
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Article XIIIA prohibits local governments from raising revenues
through ad valorem property taxes above the 1% limit; it also requires voters of
any governmental unit to give two-thirds approval to levy any "special tax".
Court decisions, however, allowed non-voter approved levy of "general taxes"
which were not dedicated to a specific use. In response to these decisions, the
voters of the State in 1986 adopted an initiative statute which imposed
significant new limits on the ability of local entities to raise or levy
general taxes, except by receiving majority local voter approval. Significant
elements of this initiative, "Proposition 62", have been overturned in recent
court cases. An initiative proposed to re-enact the provisions of Proposition
62 as a constitutional amendment was defeated by the voters in November 1990,
but such a proposal may be renewed in the future.
Limitations on Other Taxes, Fees and Charges. On November 5, 1996, the
--------------------------------------------
voters of the State approved Proposition 218, called the "Right to Vote on Taxes
Act." Proposition 218 added Articles XIIIC and XIIID to the State Constitution,
which contain a number of provisions affecting the ability of local agencies to
levy and collect both existing and future taxes, assessments, fees and charges.
Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote. Further, any general purpose tax which was imposed,
extended or increased without voter approval after December 31, 1994 must be
approved by a majority vote within two years.
Article XIIID contains several new provisions making it generally more
difficult for local agencies to levy and maintain "assessments" for municipal
services and programs. Article XIIID also contains several new provisions
affecting "fees" and "charges", defined for purposes of Article XIIID to mean
"any levy other than an ad valorem tax, a special tax, or an assessment, imposed
by a [local government] upon a parcel or upon a person as an incident of
property ownership, including a user fee or charge for a property related
service." All new and existing property related fees and charges must conform
to requirements prohibiting, among other things, fees and charges which generate
revenues exceeding the funds required to provide the property related service or
are used for unrelated purposes. There are new notice, hearing and protest
procedures for levying or increasing property related fees and charges, and,
except for fees or charges for sewer, water and refuse collection services (or
fees for electrical and gas service, which are not treated as "property related"
for purposes of Article XIIID), no property related fee or charge may be imposed
or increased without majority approval by the property owners subject to the fee
or charge or, at the option of the local agency, two-thirds voter approval by
the electorate residing in the affected area.
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In addition to the provisions described above, Article XIIIC removes
limitations on the initiative power in matters of local taxes, assessments, fees
and charges. Consequently, local voters could, by future initiative, repeal,
reduce or prohibit the future imposition or increase of any local tax,
assessment, fee or charge. It is unclear how this right of local initiative may
be used in cases where taxes or charges have been or will be specifically
pledged to secure debt issues.
The interpretation and application of Proposition 218 will ultimately
be determined by the courts with respect to a number of matters, and it is not
possible at this time to predict with certainly the outcome of such
determinations. Proposition 218 is generally viewed as restricting the fiscal
flexibility of local governments, and for this reason, some ratings of
California cities and counties have been, and others may be, reduced.
Appropriation Limits. The State and its local governments are
--------------------
subject to an annual "appropriations limit" imposed by Article XIIIB of the
California Constitution, enacted by the voters in 1979 and significantly amended
by Propositions 98 and 111 in 1988 and 1990, respectively. Article XIIIB
prohibits the State or any covered local government from spending
"appropriations subject to limitation" in excess of the appropriations limit
imposed. "Appropriations subject to limitation" are authorizations to spend
"proceeds of taxes," which consist of tax revenues and certain other funds,
including proceeds from regulatory licenses, user charges or other fees, to the
extent that such proceeds exceed the cost of providing the product or service,
but "proceeds of taxes" excludes most State subventions to local governments.
No limit is imposed on appropriations of funds which are not "proceeds of
taxes," such as reasonable user charges or fees, and certain other non-tax
funds, including bond proceeds.
Among the expenditures not included in the Article XIIIB
appropriations limit are (1) the debt service cost of bonds issued or authorized
prior to January 1, 1979, or subsequently authorized by the voters, (2)
appropriations arising from certain emergencies declared by the Governor, (3)
appropriations for certain capital outlay projects, (4) appropriations by the
State of post 1989 increases in gasoline taxes and vehicle weight fees, and (5)
appropriations made in certain cases of emergency.
The appropriations limit for each year is adjusted annually to reflect
changes in cost of living and population and any transfer of service
responsibilities between governmental units. The definitions for such
adjustments were liberalized in 1990 to follow more closely growth in the
State's economy.
"Excess" revenues are measured over a two year cycle. Local
governments must return any excess to taxpayers by rate reductions. The State
must refund 50% paid to schools and community colleges. With more liberal
annual adjustment factors since 1988, and depressed revenues since 1990 because
of the recession, few governments, including the State, are currently operating
near
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their spending limits, but this condition may change over time. The State's
1996-97 Budget Act provides for State appropriations more than $7 billion under
the Article XIIIB limit. Local governments may by voter approval exceed their
spending limits for up to four years.
Because of the complex nature of Articles XIIIA, XIIIB, XIIIC and
XIIID of the California Constitution, the ambiguities and possible
inconsistencies of their terms, and the impossibility of predicting future
appropriations or changes in population and cost of living, and the probability
of continuing legal challenges, it is not currently possible to determine fully
the impact of these articles on California Instruments. It is not presently
possible to predict the outcome of any pending litigation with respect to the
ultimate scope, impact or constitutionality of these articles, or the impact of
any such determinations upon State agencies or local governments, or upon their
ability to pay debt service or their obligations. Future initiatives or
legislative changes in laws or the California Constitution may also affect the
ability of the State or local issuers to repay their obligations.
State Debt. Under the California Constitution, debt service on
----------
outstanding general obligation bonds is the second charge to the General Fund
after support of the public school system and public institutions of higher
education. Total outstanding general obligation bonds and lease purchase debt
of California increased from $9.4 billion at June 30, 1987 to $23.8 billion at
March 1, 1997. The State also had outstanding at March 1, 1997 $358 million of
general obligation commercial paper notes which will be refunded into long-term
bonds at a later date. In FY1995-96, debt service on general obligation bonds
and lease purchase debt was approximately 5.2% of General Fund revenues. State
voters approved $6.4 billion of new general obligation bond authorizations on
the 1996 ballots.
Recent Financial Results. The principal sources of General Fund
------------------------
revenues in 1995-1996 were the California personal income tax (45% of total
revenues), the sales tax (34%), bank and corporation taxes (13%), and the gross
premium tax on insurance (3%). California maintains a Special Fund for Economic
Uncertainties (the "SFEV"), derived from General Fund revenues, as a reserve to
meet cash needs of the General Fund.
General. Throughout the 1980s, California state spending increased
-------
rapidly as California's population and economy also grew rapidly, including
increased spending for many assistance programs to local governments, which were
constrained by Proposition 13 and other laws. The largest state program is
assistance to local public school districts. In 1988, an initiative
(Proposition 98) was enacted which (subject to suspension by a two-thirds vote
of the Legislature and the Governor) guarantees local school districts and
community college districts a minimum share of California General Fund revenues
(currently about 35%).
Beginning at the start of the 1990-91 Fiscal Year, California faced
adverse economic, fiscal and budget conditions. The economic
20
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recession seriously affected California's tax revenues. It also caused
increased expenditures for health and welfare programs. Even though the economy
is recovering, California is still facing a structural imbalance in its budget
with the largest programs supported by the General Fund (education, health,
welfare and corrections) growing at rates higher than the growth rates for the
principal revenue sources of the General Fund. These structural concerns will
be exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.
Recent Budgets. As a result of these factors, among others, from the
--------------
late 1980's until 1992-93, the State had a period of nearly chronic budget
imbalance, with expenditures exceeding revenues in four out of six years, and
the State accumulated and sustained a budget deficit in the budget reserve, the
SFEU, approaching $2.8 billion at its peak at June 30, 1993. Starting in the
1990-91 Fiscal Year and for each year thereafter, each budget required
multibillion dollar actions to bring projected revenues and expenditures into
balance and to close large "budget gaps" which were identified. The Legislature
and Governor eventually agreed on a number of different steps to produce Budget
Acts in the Fiscal Years 1991-92 to 1995-96, including the following (not all of
these actions were taken each year):
. significant cuts in health and welfare program expenditures;
. transfers of program responsibilities and some funding sources from
the State to local governments, coupled with some reduction in mandates on local
government;
. transfer of about $3.6 billion in annual local property tax
revenues from cities, counties, redevelopment agencies and some other districts
to local school districts, thereby reducing state funding for schools;
. reduction in growth of support for higher education programs,
coupled with increases in student fees;
. revenue increases (particularly in the 1991-92 Fiscal Year budget),
most of which were for a short duration;
. increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal aid
than the State Administration had requested); and
. various one-time adjustment and accounting changes.
Despite these budget actions, the effects of the recession led to
large unanticipated deficits in the SFEU, as compared to projected positive
balances. By the start of the 1993-94 Fiscal
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Year, the accumulated deficit was so large (almost $2.8 billion) that it was
impractical to budget to retire it in one year, so a two-year program was
implemented, using the issuance of revenue anticipation warrants to carry a
portion of the deficit over the end of the fiscal year. When the economy failed
to recover sufficiently in 1993-94, a second two-year plan was implemented in
1994-95, to carry the final retirement of the deficit into 1995-96.
The combination of stringent budget actions cutting State
expenditures, and the turnaround of the economy by late 1993, finally led to the
restoration of positive financial results. While General Fund revenues and
expenditures were essentially equal in FY 1992-93 (following two years of excess
expenditures over revenues), the General Fund had positive operating results in
FY 1993-94 and 1995-96, which reduced the accumulated budget deficit to less
than $100 million as of June 30, 1996. The State Department of Finance estimated
that the General Fund received revenues of about $46.3 billion in FY 1995-96,
more than $2 billion higher than was originally expected, as a result of the
strengthening economy. Expenditures totaled about $45.4 billion, also about $2
billion higher than budgeted, because, among other factors, the State
Constitution requires disbursement of a percentage of revenues to local school
districts and federal actions to reduce welfare costs and to pay for costs of
illegal immigrants were not forthcoming to the extent expected.
A consequence of the accumulated budget deficits in the early 1990's,
together with other factors such as disbursement of funds to local school
districts "borrowed" from future fiscal years and hence not shown in the annual
budget, was to significantly reduce the State's cash resources available to pay
its ongoing obligations. When the Legislature and the Governor failed to adopt
a budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed
the State to carry out its normal annual cash flow borrowing to replenish its
cash reserves, the State Controller was forced to issue approximately $3.8
billion of registered warrants ("IOUs") over a 2-month period to pay a variety
of obligations representing prior years' or continuing appropriations, and
mandates from court orders. Available funds were used to make constitutionally-
mandated payments, such as debt service on bonds and warrants.
The State's cash condition became so serious that from late spring
1992 until 1995, the State had to rely on issuance of short-term notes which
matured in a subsequent fiscal year to finance its ongoing deficit and pay
current obligations. With the repayment of the last of these deficit notes in
April, 1996, the State does not plan to rely further on external borrowing
across fiscal years, but will continue its normal cash flow borrowing during a
fiscal year.
Current Budget. The 1996-97 Budget Act was signed by the Governor on
--------------
July 15, 1996, along with various implementing bills. The Legislature rejected
the Governor's proposed 15% cut in personal income taxes (to be phased over
three years), but did approve a 5% cut in bank and corporation taxes, to be
effective for
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income years starting on January 1, 1997. As a result, revenues for the Fiscal
Year are estimated to total $47.643 billion, a 3.3 percent increase over the
final estimated 1995-96 revenues. The Budget Act contains General Fund
appropriations totaling $47.251 billion, a 4.0 percent increase over the final
estimated 1995-96 expenditures.
The following are principal features of the 1996-97 Budget Act:
1. Funding for schools and community college districts increased by
$1.65 billion total above revised 1995-96 levels. Almost half of this money was
budgeted to fund class-size reductions in kindergarten and grades 1-3. Also,
for the second year in a row, the full cost of living allowance (3.2 percent)
was funded. The funding increases have brought K-12 expenditures to almost
$4,800 per pupil, an almost 15% increase over the level prevailing during the
recession years.
2. Proposed cuts in health and welfare totaling $660 million. All of
these cuts required federal law changes (including welfare reform, which was
enacted), federal waivers, or federal budget appropriations in order to be
achieved. Ultimate federal actions after enactment of the Budget Act will allow
the State to save only about $360 million of this amount.
3. A 4.9 percent increase in funding for the University of California
and the California State University system, with no increases in student fees
for the second consecutive year.
4. The Budget Act assumed the federal government would provide
approximately $700 million in new aid for incarceration and health care costs of
illegal immigrants. These funds reduce appropriations in these categories that
would otherwise have to be paid from the General Fund.
With signing of the Budget Act, the State implemented its regular cash
flow borrowing program with the issuance of $3.0 billion of Revenue Anticipation
Notes to mature on June 30, 1997. The Budget Act appropriated a modest budget
reserve in the SFEU of $305 million, as of June 30, 1997. The General Fund fund
balance, however, still reflects $1.6 billion of "loans" which the General Fund
made to local schools in the recession years, representing cash outlays above
the mandatory minimum funding level. Settlement of litigation over these
transactions in July 1996 calls for repayment of these loans over the period
ending in 2001-02, about equally split between outlays from the General Fund and
from schools' entitlements. The 1996-97 Budget Act contained a $150 million
appropriation from the General Fund toward this settlement.
The Department of Finance projected, when the Budget Act was passed,
that, on June 30, 1997, the State's available internal borrowable (cash)
resources will be $2.9 billion, after payment of all obligations due by that
date, so that no external cross-fiscal year borrowing will be needed. The State
will continue to rely on
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internal borrowing and intra-year external note borrowing to meet its cash flow
requirements.
The Department of Finance has reported that, based on stronger than
expected revenues during the first six months of the 1996-97 fiscal year,
reflecting the continued strength of the State's economic recovery, General Fund
revenues for the full 1996-97 fiscal year will be almost $800 million above
projections, at about $48.4 billion. This is expected to be offset by required
increased payments to schools, and lower than expected savings resulting from
federal welfare reform actions and federal aid for illegal immigrants. As a
result, the expected balance of the SFEU at June 30, 1997 has been slightly
reduced to about $197 million, still the first positive balance in the decade of
the 90's. The State has not yet given any prediction of how the federal
welfare reform law will impact the State's finances, or those of its local
agencies; the State is in the midst of making many decisions concerning
implementation of the new welfare law.
Proposed 1997-98 Budget On January 9, 1997, the Governor released his
-----------------------
proposed budget for FY 1997-98. Assuming continuing strength in the economy,
the Governor projects General Fund revenues of $50.7 billion, and proposes
expenditures of $50.3 billion, to leave a budget reserve in the SFEU of $550
million at June 30, 1998. The Governor proposed further programs to reduce
class size in lower primary grades, using excess revenues from FY 1996-97. He
also proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
Although the State's strong economy is producing record revenues to
the State government, the State's budget continues to be under stress from
mandated spending on education, a rising prison population, and social needs of
a growing population with many immigrants. These factors which limit State
spending growth also put pressure on local governments. There can be no
assurances that, if economic conditions weaken, or other factors intercede, the
State will not experience budget gaps in the future.
Bond Ratings. The ratings on California's long-term general
------------
obligation bonds were reduced in the early 1990's from "AAA" levels which had
existed prior to the recession. In 1996, Fitch and Standard & Poor's raised
their ratings of California's general obligation bonds, which are currently
assigned ratings of "A+" from Standard & Poor's, "A1" from Moody's and "A+" from
Fitch. There can be no assurance that such ratings will be maintained in the
future. It should be noted that the creditworthiness of obligations issued by
local California issuers may be unrelated to the creditworthiness of obligations
issued by the State of California, and that there is no obligation on the part
of California to make payment on such obligations in the event of default.
Legal Proceedings. California is involved in certain legal
------------------
proceedings (described in California's recent financial statements) that, if
decided against California, may require California to make
24
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significant future expenditures or may substantially impair revenues. Courts
have recently entered decisions which could overturn several parts of the
state's recent budget compromises. The matters covered by these lawsuits
include a deferral of payments by California to the Public Employees Retirement
System, reductions in welfare payments and the use of certain cigarette tax
funds for health costs. All of these cases are subject to further proceedings
and appeals, and if California eventually loses, the final remedies may not have
to be implemented in one year.
Obligations of Other Issuers
----------------------------
Other Issuers of California Instruments. There are a number of state
---------------------------------------
agencies, instrumentalities and political subdivisions of the State of
California that issue municipal obligations, some of which may be conduit
revenue obligations payable from payments from private borrowers. These
entities are subject to various economic risks and uncertainties, and the credit
quality of the securities issued by them may vary considerably from the credit
quality of obligations backed by the full faith and credit of the State of
California.
State Assistance. Property tax revenues received by local governments
----------------
declined more than 50% following passage of Proposition 13. Subsequently, the
California Legislature enacted measures to provide for the redistribution of
California's General Fund surplus to local agencies, the reallocation of certain
state revenues to local agencies and the assumption of certain governmental
functions by the State of California to assist municipal issuers to raise
revenues. Through 1990-91, local assistance (including public schools)
accounted for around 75% of General Fund spending. To reduce California General
Fund support for school districts, the 1992-93 and 1993-94 Budget Acts caused
local governments to transfer a total of $3.9 billion of property tax revenues
to school districts, representing loss of all the post-Proposition 13 "bailout"
aid. The largest share of these transfers came from counties, and the balance
from cities, special districts and redevelopment agencies. In order to make up
part of this shortfall, the Legislature proposed, and voters approved in 1993,
dedicating 0.5% of the sales tax to counties and cities for public safety
purposes. In addition, the Legislature has changed laws to relieve local
governments of certain mandates, allowing them to reduce costs.
To the extent that California should be constrained by its Article
XIIIB appropriations limit, or its obligation to conform to Proposition 98, or
other fiscal considerations, the absolute level, or the rate of growth, of state
assistance to local governments may continue to be reduced. Any such reductions
in state aid could compound the serious fiscal constraints already experienced
by many local governments, particularly counties. A number of counties have
indicated that their budgetary condition is extremely serious. In the 1995-96
and 1996-97 fiscal years, Los Angeles County, the largest in the State, had to
make significant cuts in services and personnel, particularly in the health care
system in order to
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balance its budget. The County's debt was downgraded by Moody's and S&P in the
summer of 1995. Orange County, which recently emerged from federal bankruptcy
protection, has substantially reduced services and personnel in order to live
within much reduced means.
Counties and cities may face further budgetary pressures as a result
of changes in welfare and public assistance programs, which will have to be
enacted by June, 1997 in order to comply with the federal welfare reform law.
It is now yet known how the State's legislation will turn out and what its
overall impact will be on local government finances.
Assessment Bonds. California Instruments which are assessment bonds
----------------
may be adversely affected by a general decline in real estate values or a
slowdown in real estate sales activity. In many cases, such bonds are secured
by land which is undeveloped at the time of issuance but anticipated to be
developed within a few years after issuance. In the event of such reduction or
slowdown, such development may not occur or may be delayed, thereby increasing
the risk of a default on the bonds. Because the special assessments or taxes
securing these bonds are not the personal liability of the owners of the
property assessed, the lien on the property is the only security for the bonds.
Moreover, in most cases the issuer of these bonds is not required to make
payments on the bonds in the event of delinquency in the payment of assessments
or taxes, except from amounts, if any, in a reserve fund established for the
bonds.
California Long-Term Lease Obligations. Certain California long-term
--------------------------------------
lease obligations, though typically payable from the general fund of the
municipality, are subject to "abatement" in the event the facility being leased
is unavailable for beneficial use and occupancy by the municipality during the
term of the lease. Abatement is not a default, and there may be no remedies
available to the holders of the certificates evidencing the lease obligation in
the event abatement occurs. The most common cases of abatement are failure to
complete construction of the facility before the end of the period during which
lease payments have been capitalized and uninsured casualty losses to the
facility (e.g. due to earthquake). In the event abatement occurs with respect
to a lease obligation, lease payments may be interrupted (if all available
insurance proceeds and reserves are exhausted) and the certificates may not be
paid when due.
Several years ago the Richmond Unified School District (the
"District") entered into a lease transaction in which certain existing
properties of the District were sold and leased back in order to obtain funds to
cover operating deficits. Following a fiscal crisis in which the District's
finances were taken over by a state receiver (including a brief period under
bankruptcy court protection), the District failed to make rental payments on
this lease, resulting in a lawsuit by the Trustee for the Certificate of
Participation holders, in which the State of California was a named defendant
(on the grounds that it controlled the District's finances). One of the
defenses raised in answer to this lawsuit
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was the invalidity of the District's lease. The trial court upheld the validity
of the lease, and the case was subsequently settled. Any ultimate judgment in
any future case against the position taken by the Trustee may have adverse
implications for lease transactions of a similar nature by other California
entities.
Other Considerations
--------------------
The repayment of industrial development securities secured by real
property may be affected by California laws limiting foreclosure rights of
creditors. Securities backed by health care and hospital revenues may be
affected by changes in state regulations governing cost reimbursements to health
care providers under Medi-Cal (the State's Medicaid program), including risks
related to the policy of awarding exclusive contracts to certain hospitals.
Limitations on ad valorem property taxes may particularly affect "tax
allocation" bonds issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project decline (e.g. because of major natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB, and only resumed such ratings on a selective basis.
Proposition 87, approved by California voters in 1988, requires that
all revenues produced by a tax rate increase go directly to the taxing entity
which increased such tax rate to repay that entity's general obligation
indebtedness. As a result, redevelopment agencies (which typically are the
issuers of tax allocation securities) no longer receive an increase in tax
increment when taxes on property in the project area are increased to repay
voter-approved bonded indebtedness.
The effect of these various constitutional and statutory changes upon
the ability of California municipal securities issuers to pay interest and
principal on their obligations remains unclear. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Legislation has been or
may be introduced which would modify existing taxes or other revenue raising
measures or which either would further limit or, alternatively, would increase
the abilities of state and local governments to impose new taxes or increase
existing taxes. It is not presently possible to predict the extent to which any
such legislation will be enacted. Nor is it presently possible to determine the
impact of any such legislation on California Instruments in which the California
Portfolio may invest, future allocations of state revenues to local governments
or the abilities of state or local governments to pay the interest on, or repay
the principal of, such California Instruments.
27
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Substantially all of California is within an active geologic region
subject to major seismic activity. Northern California in 1989 and Southern
California in 1994 experienced major earthquakes causing billions of dollars in
damages. The federal government provided more than $13 billion in aid for both
earthquakes, and neither event is expected to have any long-term negative
economic impact. Any security in the Tax-Exempt California Portfolio could be
affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax
assessment reductions. Compensatory financial assistance could be constrained by
the inability of (i) an issuer to have obtained earthquake insurance coverage at
reasonable rates; (ii) an insurer to perform on its contracts of insurance in
the event of widespread losses; or (iii) the federal or state government to
appropriate sufficient funds within their respective budget limitations.
INVESTING IN NEW YORK
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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
- -------------
a relatively high level of personal wealth. The State's economy is diverse with
a comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State has a declining proportion of its
workforce engaged in manufacturing, and an increasing proportion engaged in
service industries. New York City (the "City"), which is the most populous city
in the State and nation and is the center of the nation's largest metropolitan
area, accounts for a large portion of the State's population and personal
income.
The State has historically been one of the wealthiest states in the
nation. For decades, however, the State has grown more slowly than the nation
as a whole, gradually eroding its relative economic position.
There can be no assurance that the State economy will not experience
worse-than-predicted results in the 1996-97 fiscal year, with corresponding
material and adverse effects on the State's projections of receipts and
disbursements.
State per capita personal income has historically been significantly
higher than the national average, although the ratio has varied substantially.
State per capita income for 1994 was estimated at $25,999, which was 19.2% above
the 1994 estimated
28
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national average of $21,809. Between 1975 and 1990 total employment grew by
21.3 percent while the labor force grew only by 15.7 percent. During this
period, unemployment fell from 9.5 percent to 5.2 percent of the labor force.
In 1991 and 1992, however, total employment in the State fell by 5.5 percent.
As a result, the unemployment rate rose to 8.5 percent reflecting a recession
that has had a particularly strong impact on the entire Northeast. Calendar
years 1993 and 1994 saw only a partial recovery.
STATE BUDGET. The State Constitution requires the governor (the "Governor") to
- ------------
submit to the State legislature (the "Legislature") a balanced executive budget
which contains a complete plan of expenditures for the ensuing fiscal year and
all moneys and revenues estimated to be available therefor, accompanied by bills
containing all proposed appropriations or reappropriations and any new or
modified revenue measures to be enacted in connection with the executive budget.
The entire plan constitutes the proposed State financial plan for that fiscal
year. The Governor is required to submit to the Legislature quarterly budget
updates which include a revised cash-basis state financial plan, and an
explanation of any changes from the previous state financial plan.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995, and subsequently amended it.
The Governor's Executive Budget projected balance on a cash basis in
the General Portfolio. It reflected a continuing strategy of substantially
reduced State spending, including program restructurings, reductions in social
welfare spending, and efficiency and productivity initiatives.
On March 15, 1996, the Governor presented amendments to the 1996-97
Executive Budget to provide for balancing the 1996-97 state financial plan if
the federal government failed to adopt entitlement changes assumed to produce
savings in the State's 1996-97 Executive Budget.
The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and was based on the State's budget as enacted by
the Legislature and signed into law by the Governor, as well as actual results
for the first quarter of the current fiscal year (the "1996-97 State Financial
Plan").
The 1996-97 State Financial Plan was projected to be balanced on a
cash basis. As compared to the Governor's proposed budget as revised on March
20, 1996, the 1996-97 State Financial Plan increases General Portfolio spending
by $842 million, primarily from funding increased for education, special
education and higher education ($563 million). The balance represented funding
increases
29
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to a variety of other programs, including community projects and increased
assistance to fiscally distressed cities. Resources used to fund these
additional expenditures include $540 million in increased revenues projected for
1996-97 based on higher-than-projected tax collections during the first half of
calendar 1996, $110 million in projected receipts from a new State tax amnesty
program, and other resources including certain non-recurring resources.
The State issued its first update to the 1996-97 State Financial Plan
(the "Mid-Year Update") on October 25, 1996. Revisions have been made to
estimates of both receipts and disbursements based on: (1) updated economic
forecasts for both the nation and the State, (2) an analysis of actual receipts
and disbursements through the first six months of the fiscal year, and (3) an
assessment of changing program requirements. The Mid-Year Update reflected a
balanced 1996-97 State Financial Plan, with a reserve for contingencies in the
General Portfolio of $300 million. This reserve will be utilized to help offset
a variety of potential risks and other unexpected contingencies that the State
may face during the balance of the 1996-97 fiscal year.
Although revisions to the 1996-97 State Financial Plan contained in
the Mid-Year Update are favorable, the State faces certain risks which could
potentially cost the State up to one-half billion dollars. The Division of the
Budget believes these risks are balanced by reserves in the 1996-97 State
Financial Plan, including the $300 million reserve created in the Mid-Year
Update. However, there can be no assurance that these reserves will fully
offset litigation or other risks to the 1996-97 State Financial Plan.
One major uncertainty to the 1996-97 State Financial Plan continues to
be risks related to the economy and tax collections, which could produce either
favorable or unfavorable variances during the balance of the year. An
additional risk to the 1996-97 State Financial Plan arises from the potential
impact of certain litigation now pending against the State, which could produce
adverse effects on the State's projections of receipts and disbursements.
Similarly, certain litigation which by itself did not produce a
material judgment against the State could have an adverse impact on the 1996-97
State Financial Plan because of the precedential nature of the court's decision.
Specifically, the State Court of Appeals has denied a motion to appeal a lower
court decision in the so-called "GTE Spacenet" case, in which the court ruled
that GTE Spacenet was not subject to the 3.5 percent tax on gross receipts
imposed under section 186-a of the tax law. The court decision is limited to
provisions of section 186-a as it existed prior to the 1995 amendments, and has
little prospective effect. While this litigation in and of itself carries only
a small judgment in favor of GTE Spacenet and similar companies, the
consequences of the ruling could eventually entail refunds to other taxpayers of
several hundred million dollars. Refund claims of over
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<PAGE>
$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 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
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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.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the 1996-97 State
Financial Plan is based upon forecasts of national and State economic activity.
Economic forecasts have frequently failed to predict accurately the timing and
magnitude of changes in the national and the State economies. The Division of
Budget believes that its projections of receipts and disbursements relating to
the current State Financial Plan, and the assumptions on which they are based,
are reasonable. Actual results, however, could differ materially and adversely
from the projections set forth therein, and those projections may be changed
materially and adversely from time to time. There are also risks and
uncertainties concerning the future-year impact of actions taken in the 1996-97
budget.
In the State's 1997 fiscal year and in certain recent fiscal years,
the State has failed to enact a budget prior to the beginning of the State's
fiscal year.
RECENT FINANCIAL RESULTS. The General Portfolio is the principal operating
- ------------------------
Portfolio of the State and is used to account for all financial transactions,
except those required to be accounted for in another Portfolio. It is the
State's largest Portfolio and receives almost all State taxes and other
resources not dedicated to particular purposes.
The General Portfolio is projected to be balanced on a cash basis for
the 1996-97 fiscal year. Total receipts and transfers from other Portfolios are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Portfolio disbursements and transfers to other
Portfolios are projected to be $33.12 billion, an increase of $444 million from
the total in the prior fiscal year.
Total revenues for 1994-95 were $31.455 billion. Revenues decreased
by $173 million over the prior fiscal year, a decrease of less than one percent.
Total expenditures for 1994-95 totaled $33.079 billion, an increase of $2.083
billion, or 6.7 percent over the prior fiscal year.
The State's financial position on a GAAP (generally accepted
accounting principles) basis as of March 31, 1995 showed an accumulated deficit
in its combined governmental Portfolios of $1.666 billion, reflecting
liabilities of $14.778 billion and assets of $13.112 billion.
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DEBT LIMITS AND OUTSTANDING DEBT. There are a number of methods by which the
- --------------------------------
State of New York may incur debt. Under the State Constitution, the State may
not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
----
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State.
The State may undertake short-term borrowings without voter approval
(i) in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes, and (ii) in anticipation of the receipt of proceeds
from the sale of duly authorized but unissued general obligation bonds, by
issuing bond anticipation notes. The State may also, pursuant to specific
constitutional authorization, directly guarantee certain obligations of the
State of New York's authorities and public benefit corporations ("Authorities").
Payments of debt service on New York State general obligation and New York
State-guaranteed bonds and notes are legally enforceable obligations of the
State of New York.
The State employs additional long-term financing mechanisms, lease-
purchase and contractual-obligation financings, which involve obligations of
public authorities or municipalities that are State-supported but are not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a contractual-
obligation financing arrangement with the Local Government Assistance
Corporation ("LGAC") in an effort to restructure the way the State makes certain
local aid payments.
In 1990, as part of a State fiscal reform program, legislation was
enacted creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through New York State's annual seasonal borrowing. The legislation empowered
LGAC to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal
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borrowing of the State at $4.7 billion, less net proceeds of bonds issued by
LGAC and bonds issued to provide for capitalized interest, except in cases where
the Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing
above the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds to provide net proceeds of $4.7 billion,
completing the program. The impact of LGAC's borrowing is that the State is
able to meet its cash flow needs in the first quarter of the fiscal year without
relying on short-term seasonal borrowings.
In June 1994, the Legislature passed a proposed constitutional
amendment that would significantly change the long-term financing practices of
the State and its public authorities. The proposed amendment would permit the
State, within a formula-based cap, to issue revenue bonds, which would be debt
of the State secured solely by a pledge of certain State tax receipts (including
those allocated to State Portfolios dedicated for transportation purposes), and
not by the full faith and credit of the State. In addition, the proposed
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment could be presented to the
voters for their consideration, it had to be passed by a separately elected
legislature. The amendment was passed by the Senate and Assembly in June 1995.
The Amendment was thereafter submitted to voters in November 1995, where it was
defeated.
On January 13, 1992, S&P reduced its ratings on the State's general
obligation bonds from A to A- and, in addition, reduced its ratings on the
State's moral obligation, lease purchase, guaranteed and contractual obligation
debt. S&P also continued its negative rating outlook assessment on State
general obligation debt. On April 26, 1993, S&P revised the rating outlook
assessment to stable. On February 14, 1994, S&P raised its outlook to positive
and, on February 28, 1994, confirmed its A- rating. On January 6, 1992, Moody's
reduced its ratings on outstanding limited-liability State lease purchase and
contractual obligations from A to Baa1. On February 28, 1994, Moody's
reconfirmed its A rating on the State's general obligation long-term
indebtedness.
The State anticipated that its capital programs would be financed, in
part, by State and public authorities borrowings in 1996-97. The State expected
to issue $411 million in general obligation bonds (including $153.6 million for
purposes of redeeming outstanding bond anticipation notes) and $154 million in
general obligation commercial paper. The Legislature had also authorized the
issuance of up to $101 million in certificates of participation during the
State's 1996-97 fiscal year for equipment purchases. The
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projection of the State regarding its borrowings for the 1996-97 fiscal year may
change if circumstances require.
In the 1996 legislative session, the Legislature approved the
Governor's proposal to present to the voters in November 1996 a $1.75 billion
State general obligation bond referendum to finance various environmental
improvement and remediation projects. The Clean Water, Clean Air Bond Act was
approved by the voters in November 1996. As a result, the amount of general
obligation bonds issued during the 1996-97 fiscal year may increase above the
$411 million currently included in the 1996-97 borrowing plan to finance a
portion of this new program.
Principal and interest payments on general obligation bonds and
interest payments on bond anticipation notes were $735 million for the 1995-96
fiscal year, and were estimated to be $719 million for the 1996-97 fiscal year.
Principal and interest payments on fixed rate and variable rate bonds issued by
LGAC were $340 million for the 1995-96 fiscal year, and were estimated to be
$323 million for 1996-97.
New York State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
LITIGATION. Certain litigation pending against the State or its officers or
- ----------
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve (1)
the validity of agreements and treaties by which various Indian tribes
transferred title to New York State of certain land in central and upstate New
York; (2) certain aspects of New York State's Medicaid policies, including its
rates, regulations and procedures; (3) action against New York State and New
York City officials alleging inadequate shelter allowances to maintain proper
housing; (4) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (5)
alleged responsibility of New York State officials to assist in remedying racial
segregation in the City of Yonkers; (6) challenges by commercial insurers,
employee welfare benefit plans, and health maintenance organizations to the
imposition of 13%, 11% and 9% surcharges on inpatient hospital bills; (7)
challenges to certain aspects of petroleum business taxes; (8) action alleging
damages resulting from the failure by the State's Department of Environmental
Conservation to timely provide certain data; (9) a challenge to the
constitutionality of a State lottery game; and (10) an action seeking
reimbursement from the State for certain costs arising out of the provision of
pre-school services and programs for children with handicapped conditions.
Several actions challenging the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems have been decided
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against the State. As a result, the Comptroller developed a plan to restore the
State's retirement systems to prior funding levels. Such funding is expected to
exceed prior levels by $116 million in fiscal 1996-97, $193 million in fiscal
1997-98, peaking at $241 million in fiscal 1998-99. Beginning in fiscal 2001-
02, State contributions required under the Comptroller's plan are projected to
be less than that required under the prior funding method. As a result of the
United States Supreme Court decision in the case of State of Delaware v. State
----------------- -----
of New York, on January 21, 1994, the 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
- -----------
fiscal stability of its Authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially and
adversely affected, if any of the Authorities were to default on their
respective obligations,
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particularly with respect to debt that is State-supported or State-related. As
of September 30, 1995, date of the latest data available, there were 17
Authorities that had outstanding debt of $100 million or more. The aggregate
outstanding debt, including refunding bonds, of these 17 Authorities was $73.45
billion.
Authorities are generally supported by revenues generated by the
projects financed or operated, such as fares, user fees on bridges, highway
tolls and rentals for dormitory rooms and housing. In recent years, however,
New York State has provided financial assistance through appropriations, in some
cases of a recurring nature, to certain of the 18 Authorities for operating and
other expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This operating assistance is
expected to continue to be required in future years. In addition, certain
statutory arrangements provide for State local assistance payments otherwise
payable to localities to be made under certain circumstances to certain
Authorities. The State has no obligation to provide additional assistance to
localities whose local assistance payments have been paid to Authorities under
these arrangements. However, in the event that such local assistance payments
are so diverted, the affected localities could seek additional State Portfolios.
NEW YORK CITY AND OTHER LOCALITIES. The fiscal health of the State of New York
- ----------------------------------
may also be impacted by the fiscal health of its localities, particularly the
City of New York, which has required and continues to require significant
financial assistance from New York State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
City has achieved balanced operating results for each of its fiscal years since
1981 as reported in accordance with the then-applicable GAAP.
In 1975, New York City suffered a fiscal crisis that impaired the
borrowing ability of both the City and New York State. In that year the City
lost access to the public credit markets. The City was not able to sell short-
term notes to the public again until 1979.
In 1975, S&P suspended its A rating of City bonds. This suspension
remained in effect until March 1981, at which time the City received an
investment grade rating of BBB from S&P. On July 2, 1985, S&P revised its
rating of City bonds upward to BBB+ and on November 19, 1987, to A-. On July 2,
1993, S&P reconfirmed its A-rating of City bonds, continued its negative rating
outlook assessment and stated that maintenance of such rating depended upon the
City's making further progress towards reducing budget gaps in the outlying
years. Moody's ratings of City bonds were revised in November 1981 from B (in
effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in
May 1988 to A and again in February 1991 to Baa1. On July 10, 1995, S&P
downgraded its rating on the City's $23 billion of outstanding general
obligation bonds to "BBB+" from "A-", citing to the City's chronic structural
budget problems and weak economic outlook. S&P stated that New York City's
reliance on one-time revenue measures to close annual budget gaps,
37
<PAGE>
a dependence on unrealized labor savings, overly optimistic estimates of
revenues and state and federal aid and the City's continued high debt levels
also contributed to its decision to lower the rating. Moody's currently has the
City's rating under review for a possible downgrade.
New York City is heavily dependent on New York State and federal
assistance to cover insufficiencies in its revenues. There can be no assurance
that in the future federal and State assistance will enable the City to make up
its budget deficits. To help alleviate the City's financial difficulties, the
Legislature created the Municipal Assistance Corporation ("MAC") in 1975. Since
its creation, MAC has provided, among other things, financing assistance to the
City by refunding maturing City short-term debt and transferring to the City
proceeds received from sales of MAC bonds and notes. MAC is authorized to issue
bonds and notes payable from certain stock transfer tax revenues, from the
City's portion of the State sales tax derived in the City and, subject to
certain prior claims, from State per capita aid otherwise payable by the State
to the City. Failure by the State to continue the imposition of such taxes, the
reduction of the rate of such taxes to rates less than those in effect on July
2, 1975, failure by the State to pay such aid revenues and the reduction of such
aid revenues below a specified level are included among the events of default in
the resolutions authorizing MAC's long-term debt. The occurrence of an event of
default may result in the acceleration of the maturity of all or a portion of
MAC's debt. MAC bonds and notes constitute general obligations of MAC and do
not constitute an enforceable obligation or debt of either the State or the
City. As of December 31, 1995, MAC had outstanding an aggregate of
approximately $4.684 billion of its bonds. MAC is authorized to issue bonds and
notes to refunds its outstanding bonds and notes and to fund certain reserves,
without limitation as to principal amount, and to finance certain capital
commitments to the Transit Authority and the New York City School Construction
Authority for the 1992 through 1997 fiscal years in the event the City fails to
provide such financing.
The City and MAC have reached an agreement in principle under which
MAC will develop and implement a debt restructuring program which will provide
the City with $125 million in budget relief in fiscal year 1996, in addition to
the $20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in each of the four fiscal years starting in fiscal
year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions.
Since 1975, the City's financial condition has been subject to
oversight and review by the New York State Financial Control Board (the "Control
Board") and since 1978 the City's financial statements have been audited by
independent accounting firms. To be eligible for guarantees and assistance, the
City is required during a "control period" to submit annually for Control Board
approval, and when a control period is not in effect for Control Board review, a
financial plan for the next four fiscal
38
<PAGE>
years covering the City and certain agencies showing balanced budgets determined
in accordance with GAAP. New York State also established the Office of the
State Deputy Comptroller for New York City ("OSDC") to assist the Control Board
in exercising its powers and responsibilities. On June 30, 1986, the City
satisfied the statutory requirements for termination of the control period.
This means that the Control Board's powers of approval are suspended, but the
Board continues to have oversight responsibilities.
From time to time, the Control Board staff, OSDC, the City comptroller
and others issue reports and make public statements regarding the City's
financial condition, commenting on, among other matters, the City's financial
plans, projected revenues and expenditures and actions by the City to eliminate
projected operating deficits. Some of these reports and statements have warned
that the City may have underestimated certain expenditures and overestimated
certain revenues and have suggested that the City may not have adequately
provided for future contingencies. Certain of these reports have analyzed the
City's future economic and social conditions and have questioned whether the
City has the capacity to generate sufficient revenues in the future to meet the
costs of its expenditure increases and to provide necessary services.
On January 31, 1996, the City published the financial plan for the
1996-1999 fiscal years (the "City Financial Plan"), which is a modification to a
financial plan submitted to the Control Board on July 11, 1995. The City
Financial Plan set forth proposed actions by the City for the 1996 fiscal year
to close substantial projected budget gaps resulting from lower than projected
tax receipts and other revenues and greater than projected expenditures. In
addition to substantial proposed agency expenditure reductions, the City
Financial Plan reflected a strategy to substantially reduce spending for
entitlements for the 1996 and subsequent fiscal years, and to decrease the
City's costs for Medicaid in the 1997 fiscal year and thereafter by increasing
the federal share of Medicaid costs otherwise paid by the City. This strategy
has been the subject of substantial debate, and implementation of this strategy
will be significantly affected by State and federal budget proposals currently
being considered. It is likely that the City Financial Plan will be changed
significantly in connection with the preparation of the Executive Budget for the
1997 fiscal year as a result of the status of State and federal budget proposals
and other factors.
The City Financial Plan also set forth projections for the 1997
through 1999 fiscal years and outlined a proposed gap-closing program to
eliminate a projected gap of $2.0 billion for the 1997 fiscal year, and to
reduce projected gaps of $3.3 billion and $4.1 billion for the 1998 and 1999
fiscal years, respectively, assuming successful implementation of the gap-
closing program for the 1996 fiscal year.
The proposed gap-closing actions for the 1997 through 1999 fiscal
years included: (i) additional agency actions, totaling between $643 million
and $691 million in each of the 1997 through
39
<PAGE>
1999 fiscal years; (ii) additional savings resulting from State and federal aid
and cost containment in entitlement programs to reduce City expenditures and
increase revenues by $650 million in the 1997 fiscal year and by $727 million in
each of the 1998 and 1999 fiscal years; (iii) additional proposed federal aid of
$50 million in the 1997 fiscal year and State aid of $100 million in each of the
1997 through 1999 fiscal years; (iv) the receipt of $300 million in the 1997
fiscal year from privatization or other initiatives, certain of which actions is
expected to require legislative action by the City Council; and (v) the assumed
receipt of revenues relating to rent payments for the City's airports, totaling
$244 million, $226 million and $70 million in the 1997 through 1999 fiscal
years, respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's remedies
under the leases through pending legal actions. The City was also preparing an
additional contingency gap-closing program for the 1997 fiscal year to be
comprised of $200 million in additional agency actions.
The federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The nature and extent of the impact on the City of the federal and
State budgets, when adopted, is uncertain, and no assurance can be given that
federal or State actions included in the federal and State adopted budgets may
not have a significant adverse impact on the City's budget and the City
Financial Plan.
The projections for the 1996 through 1999 fiscal years reflected the
costs of the proposed settlement with the teachers union and the recent
settlement with a coalition of municipal unions, and assumed that the City will
reach agreement with its remaining municipal unions under terms which are
generally consistent with such settlements.
The City's financial plans have been the subject of extensive public
comment and criticism. The City comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the general
reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the City Financial Plan assumed
the implementation of highly uncertain State and federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks. The report
concluded that the magnitude of the budget risk for the 1997 fiscal year, after
two years of large agency cutbacks and workforce reductions, indicated the
seriousness of the City's continuing budget difficulties, and that the City
Financial Plan would require substantial revision in order to provide a credible
program for
40
<PAGE>
dealing with the large projected budget gap for the 1997 fiscal year.
The City since 1981 has fully satisfied its seasonal financing needs
in the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City has issued $2.4 billion of short-term
obligations in fiscal year 1996 to finance the City's current estimate of its
seasonal cash flow needs for the 1996 fiscal year. Seasonal financing
requirements for the 1995 fiscal year increased to $2.2 billion from $1.75
billion and $1.4 billion in the 1994 and 1993 fiscal years, respectively.
Certain localities, in addition to the City, could have financial
problems leading to requests for additional New York State assistance. The
potential impact on the State of such requests by localities was not included in
the State's projections of its receipts and disbursements.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the creation of the Financial Control Board for the City of Yonkers
(the "Yonkers Board") by New York State in 1984. The Yonkers Board is charged
with oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the Legislature to assist Yonkers could result in allocation of New
York State resources in amounts that cannot yet be determined.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the city of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
Municipalities and school districts have engaged in substantial short-
term and long-term borrowings. In 1994, the total indebtedness of all
localities in New York State other than New York City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
enabling New York State legislation. State law requires the comptroller to
review and make recommendations concerning the budgets of those local government
units other than New York City authorized by State law to issue debt to finance
deficits during the period that such deficit financing is outstanding.
Seventeen localities had outstanding indebtedness for deficit financing at the
close of their fiscal year ending in 1994.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased
41
<PAGE>
expenditure requirements on affected localities. If New York State, New York
City or any of the Authorities were to suffer serious financial difficulties
jeopardizing their respective access to the public credit markets, the
marketability of notes and bonds issued by localities within New York State
could be adversely affected. Localities also face anticipated and potential
problems resulting from certain pending litigation, judicial decisions and long-
range economic trends. Long-range potential problems of declining urban
population, increasing expenditures and other economic trends could adversely
affect localities and require increasing New York State assistance in the
future.
STANDBY COMMITMENTS
In order to enhance the liquidity, stability or quality of municipal
obligations, the Prime Obligations, Money Market, Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios each may acquire the right
to sell a security to another party at a guaranteed price and date. Such a
right to resell may be referred to as a put, demand feature or "standby
commitment", depending on its characteristics. The aggregate price which a
Portfolio pays for securities with standby commitments may be higher than the
price which otherwise would be paid for the securities. Standby commitments may
not be available or may not be available on satisfactory terms.
Standby commitments may involve letters of credit issued by domestic
or foreign banks supporting the other party's ability to purchase the security
from the Portfolio. The right to sell may be exercisable on demand or at
specified intervals, and may form part of a security or be acquired separately
by the Portfolio. In considering whether a security meets a Portfolio's quality
standards, the Adviser will look to the creditworthiness of the party providing
the Portfolio with the right to sell.
The Portfolios value municipal obligations which are subject to
standby commitments at amortized cost. The exercise price of the standby
commitments is expected to approximate such amortized cost. No value is
assigned to the standby commitments for purposes of determining a Portfolio's
net asset value. Since the value of a standby commitment is dependent on the
ability of the standby commitment writer to meet its obligation to repurchase,
the policy of each Portfolio that may enter into standby commitment transactions
is to enter into such transactions only with banks, brokers or dealers which
represent a minimal risk of default. The duration of standby commitments will
not be a factor in determining the weighted average maturity of a Portfolio.
Management of the Trust understands that the Internal Revenue Service
has issued a favorable revenue ruling to the effect that, under specified
circumstances, a registered investment company will be the owner of tax-exempt
municipal obligations acquired subject to a put option. Institutional Tax-
Exempt Assets, the predecessor company of which Tax-Exempt Diversified Portfolio
and Tax-Exempt
42
<PAGE>
California Portfolio were series, has received a ruling from the Internal
Revenue Service to the effect that it is considered the owner of the municipal
obligations subject to standby commitments so that the interest on such
instruments will be tax-exempt income to it. The Internal Revenue Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of the true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each of the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or acquired or held with certain other types of put rights
and that its distributions of tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt for its unitholders. There is no
assurance that standby commitments will be available to a Portfolio nor has any
Portfolio assumed that such commitments will continue to be available under all
market conditions.
INVESTMENT LIMITATIONS
The following restrictions may not be changed with respect to any
Portfolio without the approval of the majority of outstanding voting securities
of that Portfolio (which, under the Investment Company Act and the rules
thereunder and as used in the Prospectus and this Statement of Additional
Information, means the lesser of (1) 67% of the units of that Portfolio present
at a meeting if the holders of more than 50% of the outstanding units of that
Portfolio are present in person or by proxy, or (2) more than 50% of the
outstanding units of that Portfolio). Investment restrictions that involve a
maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of, a Portfolio, with the exception of borrowings
permitted by Investment Restriction (3).
Accordingly, the Trust may not, on behalf of any Portfolio:
(1) make any investment inconsistent with the Portfolio's
classification as a diversified company under the Investment Company Act of
1940, as amended ("the Act"). This restriction does not, however, apply to
any Portfolio classified as a non-diversified company under the Act.
(2) purchase securities if such purchase would cause more than 25% in
the aggregate of the market value of the total assets of a Portfolio to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to, and each Portfolio reserves freedom of action,
when
43
<PAGE>
otherwise consistent with its investment policies, to concentrate its
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, obligations (other than commercial paper)
issued or guaranteed by U.S. banks and U.S. branches of U.S. or foreign
banks and repurchase agreements and securities loans collateralized by such
U.S. Government obligations or such bank obligations. For the purposes of
this restriction, state and municipal governments and their agencies,
authorities and instrumentalities are not deemed to be industries;
telephone companies are considered to be a separate industry from water,
gas or electric utilities; personal credit finance companies and business
credit finance companies are deemed to be separate industries; and wholly
owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the
activities of their parents. Notwithstanding the foregoing, the ILA Money
Market Portfolio will invest more than 25% of the value of its total assets
in bank obligations (whether foreign or domestic) except that if adverse
economic conditions prevail in the banking industry the ILA Money Market
Portfolio may, for defensive purposes, temporarily invest less than 25% of
the value of its total assets in bank obligations.
(3) borrow money, except (a) that the Portfolio may borrow from banks
(as defined in the Act) or through reverse repurchase agreements in amounts
up to 33 1/3% of its total assets (including the amount borrowed), (b) the
Portfolio may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes, (c) the Portfolio
may obtain such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities and (d) the Portfolio may
purchase securities on margin to the extent permitted by applicable law.
(4) make loans, except (a) through the purchase of debt obligations in
accordance with each Portfolio's investment objective and policies, (b)
through repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities.
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Portfolio may be deemed to be an
underwriting.
(6) purchase, hold or deal in real estate, although the Portfolio may
purchase and sell securities that are secured by real estate or interests
therein, securities of real estate investment trusts and mortgage-related
securities and may hold and sell real estate acquired by the Portfolio as a
result of the ownership of securities.
(7) invest in commodities or commodity contracts, except that the
Portfolio may invest in currency and financial
44
<PAGE>
instruments and contracts that are commodities or commodity contracts.
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Portfolio may, notwithstanding any other fundamental investment
restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same investment
objectives, restrictions and policies as the Portfolio.
As money market funds, the Portfolios must also comply with Rule 2a-7 under
the Investment Company Act. Amendments to Rule 2a-7 have been proposed and are
expected to be effective at some time in 1997. The following assumes that such
amendments are in effect as currently proposed. While a detailed and technical
Rule, Rule 2a-7 has three basic requirements: portfolio maturity, portfolio
quality and portfolio diversification. Portfolio maturity. Rule 2a-7 requires
that the maximum maturity of any security in a Portfolio's portfolio may not
exceed 397 days and a Portfolio's average portfolio maturity may not exceed 90
days. Portfolio quality. A money market fund may only invest in First Tier and
Second Tier securities (as defined in the Rule and the Prospectus). Each
Portfolio, other than the Tax-Exempt Portfolios, as a matter of non-fundamental
policy only invests in First Tier securities. Portfolio diversification. The
Prime Obligations, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Exempt Diversified Portfolios may not invest more
than 5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such Portfolios may, however, invest up to 25% of its total assets in
the First Tier Securities of a single issuer for a period of up to three
business days after the purchase thereof. Tax-Exempt New York and Tax-Exempt
California Portfolios, with respect to 75% of their respective total assets, may
not invest more than 5% of their total assets in the securities of any one
issuer (except U.S. Government securities, repurchase agreements collateralized
by such securities and certain securities subject to a guarantee or
unconditional demand feature); provided that such funds may not invest more than
5% of their respective total assets in the securities of a single issuer unless
the securities are First Tier securities. Immediately after the acquisition of
any put (i.e., the right to sell the security within a specified period at a
price equal to its amortized cost), with respect to 75% of the assets of a
Portfolio, no more than 10% of the Portfolio's total assets may be invested in
securities issued by or subject to puts issued by the same issuer. In the case
of the Tax-Exempt Portfolios (which are the only Portfolios that invest in
Second Tier securities), immediately after the acquisition of a put that is a
Second Tier security, no more than 5% of the Tax-Exempt Portfolio's total assets
may be invested in securities or puts
45
<PAGE>
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 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 (June 1994 to April 1996);
Senior Vice President of Scott Paper
Company until June 1994; Director of
Arkwright Mutual Insurance Company;
Trustee of International House of
Philadelphia; Member of Cornell
University Council; Trustee of
the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-
1996); Co-Head of GSAM (since
December 1994).
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*John P. McNulty, 44 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner of Goldman Sachs (1990-1994 and
1995-1996); Co-Head of GSAM (since November
1995); Limited Partner of Goldman Sachs
(1994 to November 1995).
*Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of Josiah
Bryn Mawr, PA 19010 Macy, Jr. Foundation (since 1977);
Director of the Philadelphia Contributionship
(since 1985); Director of Amherst
College (since 1986); Director
of Dayton Hudson Corporation (since 1988);
Director of the Spencer Foundation (since 1993);
and member of PNC Advisory Board (since 1993).
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs
One New York Plaza (since 1994); Director and
New Yor, NY 10004 Vice President of Goldman Sachs Funds
Management, Inc. (from April 1990 to
November 1994); President and Chief
Operating Officer, GSAM (from September
1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee,
One 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 of Ameritech (a telecommunications holding
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
company)(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co.
(a closed-end, management investment
company).
Richard P. Strubel, 57 Trustee Managing Director, Tandem
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).
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs
One New York Plaza & President (since May 1996); President,
New York, NY 10004 MFS Retirement Services Inc.,
of Massachusetts Financial
Services(prior thereto).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Admin-
One New York Plaza istration, GSAM (since April
New York, NY 10004 1994); Assistant Treasurer,
Goldman Sachs Funds Management,
Inc. (since March 1993); Vice
President, Goldman Sachs (since
March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs
One New York Plaza Treasurer (since July 1995); Director,
New York, NY 10004 Investors Bank and Trust
Company (November 1993 to July
1995); Audit Manager of Arthur
Andersen LLP (prior thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman
4900 Sears Tower President Sachs (since June 1992);
Chicago, IL 60606 Director, Shareholder Servicing
of GSAM (since June 1992).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs
4900 Sears Tower President and Manager of Shareholder Servicing
Chicago, IL 60606 of GSAM (since November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder Ser-
Chicago, IL 60606 vicing of GSAM (since November 1989).
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY 10004 Vice President and Assistant
General Counsel of Goldman Sachs (since June
1992); 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, GSAM (since November 1993);
Associate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie A. Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since
March 1997); Associate of Shereff
Friedman, Hoffman & Goodman
(prior thereto).
*Steven E. Hartstein, 33 Assistant Legal Products Analyst,
85 Broad Street Secretary Goldman Sachs (June 1993 to
New York, NY 10004 present); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 to June
1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM
New York, NY 10004 (since 1988).
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (1995-1996);
Funds Trading Assistant, GSAM
(1993-1995); Compliance Analyst,
Prudential Insurance (1991-1993).
</TABLE>
49
<PAGE>
Each interested Trustee and officer holds comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or an affiliate
thereof is the investment adviser, administrator and/or distributor. As of
April 1, 1997, the Trustees and officers of the Trust as a group owned less than
1% of the outstanding units of beneficial interest of each of the Portfolios.
The Trust pays each of its Trustees, other than those who are "interested
persons" of Goldman Sachs a fee for each Trustee meeting attended and an annual
fee. Such Trustees are also reimbursed for travel expenses incurred in
connection with attending such meetings.
50
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman
Aggregate Accrued as Sachs Funds
Compensation Part of (including
from the Portfolios' the
Name of Trustee Portfolios Expenses Portfolios)*
- --------------- ---------- -------- ------------
<S> <C> <C> <C>
Paul C. Nagel, Jr.** $18,150 $0 $62,450
Ashok N. Bakhru $22,729 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $18,893 $0 $58,954
William H. Springer $18,893 $0 $58,954
Richard P. Strubel $18,893 $0 $58,954
</TABLE>
- --------------
* The Goldman Sachs Funds consisted of 29 mutual funds, including the nine
portfolios, on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee Trust on May 1, 1996.
51
<PAGE>
THE ADVISER, DISTRIBUTOR AND
TRANSFER AGENT
THE ADVISER
GSAM, a separate operating division of Goldman Sachs, acts as the
investment adviser to the Portfolios. Under the Advisory Agreement between
Goldman Sachs on behalf of GSAM and the Trust on behalf of the Portfolios, GSAM,
subject to the supervision of the Board of Trustees of the Trust and in
conformity with the stated policies of each Portfolio, acts as investment
adviser and directs the investments of the Portfolios. In addition, GSAM
administers the Portfolios' business affairs and, in connection therewith,
furnishes the Trust with office facilities and (to the extent not provided by
the Trust's custodian, transfer agent, or other organizations) clerical
recordkeeping and bookkeeping services and maintains the financial and account
records required to be maintained by the Trust. As compensation for these
services and for assuming expenses related thereto, the Trust pays GSAM a fee,
computed daily and paid monthly at an annual rate of .35% of each Portfolio's
average daily net assets. GSAM has agreed to reduce or otherwise limit certain
other expenses (excluding fees payable to Service Organizations, taxes,
interest, brokerage and litigation, indemnification and other extraordinary
expenses) of each Portfolio, on an annualized basis, to .06% of the average
daily net assets of the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios; and to .07% of the average daily
net assets of the Prime Obligations, Treasury Obligations, Government and Tax-
Exempt California Portfolios. The amount of such reductions or limits, if any,
are calculated monthly and are based on the cumulative difference between a
Portfolio's estimated annualized expense ratio and the expense limit for that
Portfolio. This amount shall be reduced by any prior payments related to the
current fiscal year. GSAM has also voluntarily agreed to waive a portion of its
advisory fee for the Treasury Instruments, Money Market, Federal, Tax-Exempt
Diversified and Tax-Exempt New York Portfolios during the fiscal year ended
December 31, 1996.
The Trust, on behalf of each Portfolio, is responsible for all
expenses other than those expressly borne by GSAM under the Portfolios' Advisory
Agreement. The expenses borne by Units of each Portfolio include, without
limitation, the fees payable to GSAM, the fees and expenses of the Portfolios'
custodian, fees and expenses of the Portfolios' transfer agent, filing fees for
the registration or qualification of Units under federal or state securities
laws, expenses of the organization of the Portfolios, taxes (including income
and excise taxes, if any), interest, costs of liability insurance, fidelity
bonds, indemnification or contribution, any costs, expenses or losses arising
out of any liability of, or claim for damages or other relief asserted against,
the Portfolios for violation of any law, legal and auditing and tax fees and
expenses (including the cost of legal and certain accounting services rendered
by employees of Goldman Sachs with respect to the
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<PAGE>
Portfolios), expenses of preparing and setting in type prospectuses, statements
of additional information, proxy material, reports and notices, the printing and
distribution of the same to Unitholders and regulatory authorities, its
proportionate share of the compensation and expenses of its "non-interested"
Trustees, and extraordinary expenses incurred by the Portfolios.
The Advisory Agreement entered into on behalf of the Portfolios was
most recently approved by the Board of Trustees, including the"non-interested"
Trustees, on April 23, 1997 and by the unitholders of each Portfolio (other than
the Treasury Instruments and Tax-Exempt New York Portfolios) on April 19, 1990
and by the unitholders of the Treasury Instruments and Tax-Exempt New York
Portfolios on June 3, 1991. The Advisory Agreement will remain in effect until
June 30, 1998, and will continue in effect thereafter only if such continuance
is specifically approved at least annually by a majority of the Trustees or by a
vote of a majority of the outstanding voting securities of the particular
Portfolio, as defined in the Investment Company Act, and, in either case, by a
majority of "non-interested" Trustees.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994 the amount of the advisory fee incurred by each Portfolio was
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio $5,185,990 $6,728,074 $9,135,344
Money Market Portfolio 2,955,074 2,618,275 2,663,551
Treasury Obligations Portfolio 3,157,511 3,206,490 3,545,307
Treasury Instruments Portfolio 1,555,342 1,079,236 687,965
Government Portfolio 2,509,206 3,259,056 4,804,362
Federal Portfolio 5,426,430 4,543,196 3,396,214
Tax-Exempt Diversified Portfolio 3,850,742 3,795,451 4,372,766
Tax-Exempt California Portfolio 1,410,751 1,030,447 867,058
Tax-Exempt New York Portfolio 266,835 234,853 150,735
</TABLE>
GSAM agreed not to impose a portion of its advisory fees for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994 with respect to
the Money Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-
Exempt New York Portfolios. Had such fees been imposed, the following
additional fees would have been incurred for the periods indicated:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Money Market Portfolio $ 492,512 $ 436,325 $ 443,925
Treasury Instruments Portfolio 2,073,789 1,438,992 917,292
Federal Portfolio 4,069,823 3,407,655 2,547,168
Tax-Exempt Diversified Portfolio 1,540,297 1,518,129 1,749,116
Tax-Exempt New York Portfolio 92,366 109,464 123,050
</TABLE>
53
<PAGE>
In addition, GSAM assumed certain expenses related to the operations of each
Portfolio during various periods of 1996, 1995 and 1994 to the extent such
expenses would have caused each Portfolio's total expenses to exceed, on an
annualized basis, certain contractual or voluntary expense limitations. Had
these expenses not been assumed, the following additional expenses would have
been incurred for such years:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Prime Obligations Portfolio $234,432 $347,317 $635,085
Money Market Portfolio 243,590 135,715 301,326
Treasury Obligations Portfolio 212,886 203,882 371,456
Treasury Instruments Portfolio 220,794 223,652 150,525
Government Portfolio 231,536 276,785 526,310
Federal Portfolio 452,463 302,153 326,417
Tax-Exempt Diversified Portfolio 24,367 239,829 217,296
Tax-Exempt California Portfolio 22,092 19,625 34,612
Tax-Exempt New York Portfolio 16,029 32,403 51,675
</TABLE>
The Advisory Agreement provides that GSAM shall not be liable to a
Portfolio for any error of judgment by GSAM or for any loss sustained by the
Portfolio except in the case of GSAM's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. Each Portfolio may use any name
derived from the name "Goldman Sachs" only so long as the Advisory Agreement
remains in effect. The Advisory Agreement also provides that it shall terminate
automatically if assigned and that it may be terminated with respect to any
particular Portfolio without penalty by vote of a majority of the Trustees or a
majority of the outstanding voting securities of that Portfolio on 60 days'
written notice to GSAM or by GSAM without penalty at any time on 90 days'
written notice to the Trust.
Under the Advisory Agreement, GSAM is also responsible for the
administration of each Portfolio's business affairs subject to the supervision
of the Trustees and, in connection therewith, furnishes each Portfolio with
office facilities and is responsible for ordinary clerical, recordkeeping and
bookkeeping functions, to the extent not provided pursuant to the Portfolios'
custodian agreements; preparation and filing of documents required to comply
with federal and state securities laws; supervising the activities of the
Portfolios' custodian and transfer agent; providing assistance in connection
with meetings of the Trustees and unitholders; and other administrative services
necessary to conduct the Trust's business.
In managing the Tax-Exempt Diversified Portfolio, the Tax-Exempt
California Portfolio and the Tax-Exempt New York Portfolio, GSAM will draw upon
the extensive research generated by Goldman Sachs' Municipal Credit Group. The
Credit Group's research team continually reviews current information regarding
the issuers of municipal and other tax-exempt securities, with particular focus
on long-term creditworthiness, short-term liquidity, debt service
54
<PAGE>
costs, liability structures, and administrative and economic characteristics.
THE DISTRIBUTOR AND TRANSFER AGENT
Goldman Sachs acts as principal underwriter and distributor of each
Portfolio's units. The Distribution Agreement between Goldman Sachs and the
Trust was most recently approved by the Trustees on April 23, 1997. Goldman
Sachs retained approximately $300 of commissions on redemptions of Class B
shares during 1996. Goldman Sachs also serves as the Portfolios' transfer
agent. Goldman Sachs provides customary transfer agency services to the
Portfolios, including the handling of unitholder communications, the processing
of unitholder transactions, the maintenance of unitholder account records,
payment of dividends and distributions and related functions. For these
services, Goldman Sachs receives .04% (on an annualized basis) of the average
daily net assets with respect to each Portfolio (other than the Prime
Obligations Portfolio). With respect to the Prime Obligations Portfolio,
Goldman Sachs is entitled to receive a fee from the Portfolio equal to the
classes proportionate share of the total transfer agency fees borne by the
Portfolio, which are equal to $12,000 per year plus $7.50 per account, together
with out-of-pocket expenses (including those out of pocket expenses payable to
servicing agents) applicable to ILA Class B Units and .04% of the average daily
net assets of the other classes of the Prime Obligations Portfolio. Goldman
Sachs may from time to time agree that the fee it would otherwise be entitled to
receive under its transfer agency agreement will be reduced.
For the fiscal years ended December 31, 1996, December 31, 1995 and December 31,
1994 the Portfolios incurred transfer agency fees as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Prime Obligations Portfolio $ 592,685 $768,923 $1,044,039
Money Market Portfolio 394,010 349,060 355,140
Treasury Obligations Portfolio 360,858 366,456 405,178
Treasury Instruments Portfolio 414,758 287,798 183,457
Government Portfolio 286,766 372,463 549,070
Federal Portfolio 1,085,286 908,708 679,243
Tax-Exempt Diversified Portfolio 616,119 607,252 699,643
Tax-Exempt California Portfolio 161,229 117,765 99,092
Tax-Exempt New York Portfolio 41,051 39,298 32,139
</TABLE>
Goldman Sachs is one of the largest international investment banking
firms in the United States. Founded in 1869, Goldman Sachs is a major
investment banking and brokerage firm providing a broad range of financing and
investment services both in the United States and abroad. As of November 29,
1996, Goldman Sachs and its consolidated subsidiaries had assets of
approximately $152 billion and partners' capital of $5.2 billion. Goldman
Sachs became registered as an investment adviser in 1981. As of March 24, 1997,
Goldman Sachs, together with its affiliates, acted as investment
55
<PAGE>
adviser, administrator or distributor for approximately $104.9 billion in total
assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS
-----------------------------------------------------------------
MANAGED BY GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and
- ------------------------
their affiliates, in the management of, or their interest in, other accounts and
other activities of Goldman Sachs may present conflicts of interest with
respect to the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Adviser and its advisory affiliates have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
objectives similar to those of the Portfolios and/or which engage in
transactions in the same types of securities, currencies and instruments as the
Portfolios. Goldman Sachs and its affiliates are major participants in the
global currency, equities, swap and fixed-income markets, in each case on a
proprietary basis and for the accounts of customers. As such, Goldman Sachs and
its affiliates are actively engaged in transactions in the same securities,
currencies, and instruments in which the Portfolios invest. Such activities
could affect the prices and availability of the securities, currencies, and
instruments in which the Portfolios invest, which could have an adverse impact
on each Portfolio's performance. Such transactions, particularly in respect of
proprietary accounts or customer accounts other than those included in the
Adviser's and its advisory affiliates' asset management activities, will be
executed independently of the Portfolios' transactions and thus at prices or
rates that may be more or less favorable. When the Adviser and its advisory
affiliates seek to purchase or sell the same assets for their managed accounts,
including the Portfolios, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
to be equitable. In some cases, this system may adversely affect the size or the
price of the assets purchased or sold for the Portfolios.
From time to time, the Portfolios' activities may be restricted
because of regulatory restrictions applicable to Goldman Sachs and its
affiliates, and/or their internal policies designed to comply with such
restrictions. As a result, there may be periods, for example, when the Adviser,
and/or its affiliates, will not initiate or recommend certain types of
transactions in certain securities or instruments with respect to which, or in
securities of issuers for which, the Adviser and/or its affiliates are
performing services or when position limits have been reached.
In connection with their management of the Portfolios, the Adviser may
have access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Adviser will not be under
any obligation, however, to effect transactions on behalf of the Portfolios in
accordance with such analysis and models. In addition, neither Goldman
Sachs
56
<PAGE>
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Portfolios and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Portfolios. The proprietary activities or portfolio strategies of Goldman Sachs
and its affiliates or the activities or strategies used for accounts managed by
them or other customer accounts could conflict with the transactions and
strategies employed by the Adviser in managing the Portfolios.
The results of each Portfolio's investment activities may differ
significantly from the results achieved by the Adviser and its affiliates for
their proprietary accounts or accounts (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 Portfolio. Moreover, it is possible that a Portfolio will sustain losses
during periods in which Goldman Sachs and its affiliates achieve significant
profits on their trading for proprietary or other accounts. The opposite result
is also possible.
An investment policy committee which may include partners of Goldman
Sachs and its affiliates may develop general policies regarding a Portfolio's
activities, but will not be involved in the day-to-day management of such
Portfolio. In such instances, those individuals may, as a result, obtain
information regarding the Portfolio's proposed investment activities which is
not generally available to the public. In addition, by virtue of their
affiliation with Goldman Sachs, any such member of an investment policy
committee will have direct or indirect interests in the activities of Goldman
Sachs and its affiliates in securities, currencies and investments similar to
those in which the Portfolio invests.
In addition, certain principals and certain of the employees of the
Adviser are also principals or employees of Goldman Sachs or its affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
The Adviser may enter into transactions and invest in instruments in
which customers of Goldman Sachs serve as the counterparty, principal or issuer.
In such cases, such party's interests in the transaction will be adverse to the
interests of the Portfolios, and such party may have no incentive to assure
that the Portfolios obtain the best possible prices or terms in connection with
the transactions. Goldman Sachs and its affiliates may also create, write or
issue derivative instruments for customers of Goldman Sachs or its affiliates,
the underlying securities currencies or instruments of which may be those in
which the Portfolios invest or which may be based on the performance of
57
<PAGE>
a Portfolio. The Portfolios may, subject to applicable law, purchase
investments which are the subject of an underwriting or other distribution by
Goldman Sachs or its affiliates and may also enter into transactions with other
clients of Goldman Sachs or its affiliates where such other clients have
interests adverse to those of the Portfolios. At times, these activities may
cause departments of the Firm to give advice to clients that may cause these
clients to take actions adverse to the interest of the client. To the extent
affiliated transactions are permitted, the Portfolios will deal with Goldman
Sachs and its affiliates on an arm's-length basis.
Each Portfolio will be required to establish business relationships
with its counterparties based on the Portfolio's own credit standing. Neither
Goldman Sachs nor its affiliates will have any obligation to allow their credit
to be used in connection with a Portfolio's establishment of its business
relationships, nor is it expected that a Portfolio's counterparties will rely on
the credit of Goldman Sachs or any of its affiliates in evaluating the
Portfolio's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is
not required to, purchase and hold shares of a Portfolio in order to increase
the assets of the Portfolio. Increasing a Portfolio's assets may enhance
investment flexibility and diversification and may contribute to economies of
scale that tend to reduce a Portfolio's expense ratio. Goldman Sachs reserves
the right to redeem at any time some or all of the shares of a Portfolio
acquired for its own account. A large redemption of shares of a Portfolio by
Goldman Sachs could significantly reduce the asset size of the Portfolio, which
might have an adverse effect on a Portfolio's investment flexibility, portfolio
diversification and expense ratio. Goldman Sachs will consider the effect of
redemptions on a Portfolio and other unitholders in deciding whether to redeem
its units.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Portfolios and of all
other accounts managed by GSAM for execution with many firms. GSAM uses its
best efforts to obtain execution of portfolio transactions at prices which are
advantageous to each Portfolio and at reasonable competitive spreads or (when a
disclosed commission is being charged) at reasonably competitive commission
rates. In seeking such execution, GSAM will use its best judgment in evaluating
the terms of a transaction, and will give consideration to various relevant
factors, including without limitation the size and type of the transaction, the
nature and character of the market for the security, the confidentiality, speed
and certainty of effective execution required for the transaction, the general
execution and operational capabilities of the broker-dealer, the general
execution and operational capabilities of the firm, the reputation, reliability,
experience and financial condition of the firm, the value and quality of the
services rendered by the firm in this and other transactions, and the
reasonableness of the spread
58
<PAGE>
or commission, if any. Securities purchased and sold by the Portfolios are
generally traded in the over-the-counter market on a net basis (i.e., without
commission) through broker-dealers and banks acting for their own account rather
than as brokers, or otherwise involve transactions directly with the issuer of
such securities.
Goldman Sachs is active as an investor, dealer and/or underwriter in
many types of municipal and money market instruments. Its activities in this
regard could have some effect on the markets for those instruments which the
Portfolios buy, hold or sell. An order has been granted by the SEC under the
Investment Company Act which permits the Portfolios to deal with Goldman Sachs
in transactions in certain taxable securities in which Goldman Sachs acts as
principal. As a result, the Portfolios may trade with Goldman Sachs as
principal subject to the terms and conditions of such exemption.
Under the Investment Company Act, the Portfolios are prohibited from
purchasing any instrument of which Goldman Sachs is a principal underwriter
during the existence of an underwriting or selling syndicate relating to such
instrument, absent an exemptive order (the order referred to in the preceding
paragraph will not apply to such purchases) or the adoption of and compliance
with certain procedures under such Act. The Trust has adopted procedures which
establish, among other things, certain limitations on the amount of debt
securities that may be purchased in any single offering and on the amount of the
Trust's assets that may be invested in any single offering. Accordingly, in
view of Goldman Sachs' active role in the underwriting of debt securities, a
Portfolio's ability to purchase debt securities in the primary market may from
time to time be limited.
In certain instances there may be securities which are suitable for
more than one Portfolio as well as for one or more of the other clients of GSAM.
Investment decisions for each Portfolio and for GSAM's other clients are made
with a view to achieving their respective investment objectives. It may develop
that a particular security is bought or sold for only one client even though it
might be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a 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 Portfolio believes that over time its ability to participate in volume
transactions will produce better executions for the Portfolios.
59
<PAGE>
During the fiscal year ended December 31, 1996, the Trust acquired and
sold securities of its regular broker/dealers: Bear Stearns, Chase Manhattan,
Daiwa Securities, Lehman, Morgan Stanley, Smith Barney Inc., Swiss Bank Corp.
and Union Bank of Switzerland.
As of December 31, 1996, the Prime Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1 under the Investment Company Act, or their parents ($ in thousands):
Chase Manhattan ($57,038), Smith Barney ($30,000), Morgan Stanley ($58,323), and
Swiss Bank Corp. ($3,806).
As of December 31, 1996, the Money Market Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1
under the Investment Company Act, or their parents ($ in thousands): Bear
Stearns ($34,778), Morgan Stanley ($70,359), Chase Manhattan ($30,388), and
Swiss Bank Corp. ($13,730).
As of December 31, 1996, the Treasury Obligations Portfolio held the
following amounts of securities of its regular broker/dealers; as defined in
Rule 10b-1, or their parents ($ in thousands): Bear Stearns Companies ($35,000),
Daiwa Securities ($35,000), Lehman ($35,000), Smith Barney Inc. ($30,000), Union
Bank of Switzerland ($30,000), Chase Manhattan ($107,833), Morgan Stanley
($129,400), and Swiss Bank Corp. ($58,316).
As of December 31, 1996, the Government Portfolio held the following
amounts of securities of its regular broker/dealers; as defined in Rule 10b-1,
or their parents ($ in thousands): Bear Stearns Companies ($30,000), Daiwa
Securities ($30,000), Lehman ($30,000), Morgan Stanley ($120,363), Chase
Manhattan ($100,303), and Swiss Bank Corp. ($54,244).
NET ASSET VALUE
The net asset value per unit of each Portfolio is determined by the
Portfolios' custodian as of the close of regular trading on the New York Stock
Exchange (normally 4:00 p.m. New York time) on each Business Day. A Business
Day means any day on which the New York Stock Exchange is open, except for days
on which Chicago, Boston or New York banks are closed for local holidays. Such
holidays include: New Year's Day, Martin Luther King Day, 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
60
<PAGE>
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Portfolio
would receive if it sold the instrument. During such periods, the yield to an
investor in a Portfolio may differ somewhat from that obtained in a similar
investment company which uses available market quotations to value all of its
portfolio securities. During periods of declining interest rates, the quoted
yield on units of a Portfolio may tend to be higher than a like computation made
by a fund with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by a Portfolio resulted in a
lower aggregate portfolio value on a particular day, a prospective investor in
the Portfolio would be able to obtain a somewhat higher yield if he or she
purchased units of the Portfolio on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.
The Trustees have established procedures designed to stabilize, to the
extent reasonably possible, each Portfolio's price per unit as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
each Portfolio by the Trustees, at such intervals as they deem appropriate, to
determine whether the Portfolio's net asset value calculated by using available
market quotations (or an appropriate substitute which reflects market
conditions) deviates from $1.00 per unit based on amortized cost, as well as
review of methods used to calculate the deviation. If such deviation exceeds
1/2 of 1%, the Trustees will promptly consider what action, if any, will be
initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
unitholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of units in kind; or establishing a net
asset value per unit by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per unit at $1.00 the
Trustees have the authority (1) to reduce or increase the number of units
outstanding on a pro rata basis, and (2) to offset each unitholder's pro rata
portion of the deviation between the net asset value per unit and $1.00 from the
unitholder's accrued dividend account or from future dividends. Each Portfolio
may hold cash for the purpose of stabilizing its net asset value per unit.
Holdings of cash, on which no return is earned, would tend to lower the yield on
such Portfolio's units.
In order to continue to use the amortized cost method of valuation for
each Portfolio's investments, the Portfolios must comply with Rule 2a-7. See
"Investment Restrictions."
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<PAGE>
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.
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
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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) to the 365th power/7] - 1
The Tax-Exempt Diversified, Tax-Exempt California, Tax-Exempt New
York, Federal and Treasury Instruments Portfolios may also advertise a tax-
equivalent yield which is computed by dividing that portion of a Portfolio's
yield (as computed above) which is tax-exempt by one minus a stated income tax
rate and adding the quotient to that portion, if any, of the yield of the
Portfolio that is not tax-exempt.
Unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, the return for a Portfolio will fluctuate
from time to time and does not provide a basis for determining future returns.
Return is a function of portfolio quality, composition, maturity and market
conditions as well as of the expenses allocated to each Portfolio. The return
of a Portfolio may not be comparable to other investment alternatives because of
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate return.
The yield, effective yield and tax-equivalent yield of each Portfolio
with respect to ILA Units, ILA Administration Units, ILA Service Units and ILA
Class B Units for the seven-day period ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio:
ILA Units 5.12 5.25 N/A
ILA Administration Units 4.97 5.10 N/A
ILA Service Units 4.72 4.85 N/A
ILA Class B Units 4.12 4.25 N/A
Money Market Portfolio:
ILA Units 5.20 5.33 N/A
ILA Administration Units 5.05 5.18 N/A
ILA Service Units 4.80 4.93 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Treasury Obligations Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Treasury Instruments Portfolio:
ILA Units 4.84 4.95 N/A
ILA Administration Units 4.69 4.80 N/A
ILA Service Units 4.44 4.55 N/A
Government Portfolio:
ILA Units 5.19 5.32 N/A
ILA Administration Units 5.04 5.17 N/A
ILA Service Units 4.79 4.92 N/A
Federal Portfolio:
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Tax-Exempt Diversified Portfolio:
ILA Units 3.58 3.64 5.93
ILA Administration Units 3.43 3.49 5.68
ILA Service Units 3.18 3.24 5.26
Tax-Exempt California Portfolio***:
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.52 3.58 5.83
ILA Administration Units 3.37 3.43 5.58
ILA Service Units** 3.12 3.18 5.17
</TABLE>
- -------------------------
* 6.39%, 6.12% and 5.67% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.72%, 6.43% and 5.96%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking California State taxes into account.
The information set forth in the foregoing table reflects certain fee
reductions and expense limitations voluntarily agreed to by the Adviser. See
"The Adviser, Distributor and Transfer Agent." In the absence of such fee
reductions and expense limitations, the yield of each Portfolio for the same
period would have been as follows:
<TABLE>
<CAPTION>
Tax-
Effective Equivalent
Yield Yield Yield
----- --------- ----------
<S> <C> <C> <C>
Prime Obligations Portfolio
ILA Units 5.10 5.23 N/A
ILA Administration Units 4.95 5.08 N/A
ILA Service Units 4.70 4.83 N/A
ILA Class B Units 4.10 4.23 N/A
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Money Market Portfolio
ILA Units 5.15 5.28 N/A
ILA Administration Units 5.00 5.13 N/A
ILA Service Units 4.75 4.88 N/A
Treasury Obligations Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Treasury Instruments Portfolio
ILA Units 4.62 4.73 N/A
ILA Administration Units 4.47 4.58 N/A
ILA Service Units 4.22 4.33 N/A
Government Portfolio
ILA Units 5.16 5.30 N/A
ILA Administration Units 5.01 5.15 N/A
ILA Service Units 4.76 4.90 N/A
Federal Portfolio
ILA Units 4.99 5.11 N/A
ILA Administration Units 4.84 4.96 N/A
ILA Service Units 4.59 4.71 N/A
Tax-Exempt Diversified Portfolio
ILA Units 3.48 3.54 5.76
ILA Administration Units 3.33 3.39 5.51
ILA Service Units 3.08 3.14 5.10
Tax-Exempt California Portfolio***
ILA Units 3.47 3.53 5.75
ILA Administration Units 3.32 3.38 5.50
ILA Service Units** 3.07 3.13 5.08
Tax-Exempt New York Portfolio*
ILA Units 3.42 3.48 5.66
ILA Administration Units 3.27 3.33 5.41
ILA Service Units** 3.02 3.08 5.00
</TABLE>
- ----------
* 6.21%, 5.94% and 5.48% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking New York State taxes into account,
and 6.53%, 6.24% and 5.77%, respectively, when taking New York City taxes
into account.
** Assuming such Units had been outstanding and were subject to maximum
administration or service fees.
*** 6.48%, 6.20% and 5.73% for the ILA Units, ILA Administration Units and ILA
Service Units, respectively, when taking the California State Taxes into
account.
The quotations of tax-equivalent yield set forth above for the seven-day
period ended December 31, 1996 are based on a federal marginal tax rate of
39.6%.
With respect to the Tax-Exempt California Portfolio, the California top
marginal State personal income tax rate of 9.30% is being assumed in addition to
the 39.6% federal tax rate, for a combined tax rate of 46.42%. With respect to
the Tax-Exempt New York Portfolio, the tax equivalent yields are being shown
under
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three scenarios. The first scenario assumes a federal marginal tax rate of
39.6%, the second scenario assumes a New York top marginal State personal income
tax rate of 6.85%, for a combined effective tax rate of 44.94%. The third
scenario assumes a New York City top marginal personal income tax rate of 4.46%
in addition to the above federal and New York State tax rates, for a combined
effective tax rate of 47.63%. The combined tax rates assume full deductibility
of state and, if applicable, city taxes in computing federal tax liability.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or recommended by GSAM and/or
its affiliates, certain attributes or benefits to be derived from asset
allocation strategies and the Goldman Sachs mutual funds that may form a part of
such an asset allocation strategy. Such advertisements and information may also
include a discussion of GSAM's current economic outlook and domestic and
international market views and recommend periodic tactical modifications to
current asset allocation strategies. Such advertisements and information may
include other material which highlight or summarize the services provided in
support of an asset allocation program.
From time to time any Portfolio may publish an indication of its past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Money, Morningstar Mutual Funds, Micropal, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
The Trust may also advertise information which has been provided to the NASD
for publication in regional and local newspapers. In addition, the Trust may
from time to time advertise a Portfolio's performance relative to certain
indices and benchmark investments, including (without limitation): inflation and
interest rates, certificates of deposit (CDs), money market deposit accounts
(MMDAs), checking accounts, savings accounts and repurchase agreements. The
Trust may also compare a Portfolio's performance with that of other mutual funds
with similar investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Portfolio's performance data will be based on historical results and is not
intended to indicate future performance. A Portfolio's performance will vary
based on market conditions, portfolio expenses, portfolio investments and other
factors.
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Return for a Portfolio will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield or return.
The Trust may also, at its discretion, from time to time make a list of a
Portfolio's holdings available to investors upon request. The Trust may from
time to time summarize the substance of discussions contained in shareholder
reports in advertisements and publish the Adviser's views as to markets, the
rationale for a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to unitholders.
TAX INFORMATION
Each Portfolio has qualified and has elected or intends to qualify and elect
to be treated and to qualify as a separate regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code").
Such qualification does not involve supervision of management or investment
practices or policies by any governmental agency or bureau.
In order to qualify as a regulated investment company, each Portfolio must,
among other things, (a) derive at least 90% of its gross income for the taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities or certain other
investments (the "90% Test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock or securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the Portfolio's total gross assets is represented by
cash and cash items (including receivables), U.S. Government securities,
securities of other regulated investment companies and other securities limited,
in respect of any one issuer, to an amount not greater in value than 5% of the
value of the Portfolio's total assets and not more than 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of the
Portfolio's total (gross) assets is invested in the securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one issuer or two or more issuers controlled by the Portfolio and engaged in
the same, similar or related trades or businesses. For purposes of these
requirements, participation interests will be treated as securities, and the
issuer will be identified on the basis of market risk and credit risk associated
with any particular interest. Certain payments received with respect to such
interests, such as commitment fees and certain facility fees, may not be treated
as income qualifying under the 90% test.
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<PAGE>
Each Portfolio, as a regulated investment company, will not be subject to
federal income tax on any of its net investment income and net realized capital
gains that are distributed to unitholders with respect to any taxable year in
accordance with the Code's timing and other requirements, provided that the
Portfolio distributes at least 90% of its investment company taxable income
(generally, all of its net taxable income other than "net capital gain," which
is the excess of net long-term capital gain over net short-term capital loss)
for such year and, in the case of any Portfolio that earns tax-exempt interest,
at least 90% of the excess of the tax-exempt interest it earns over certain
disallowed deductions. A Portfolio will be subject to federal income tax at
regular corporate rates on any investment company taxable income or net capital
gain that it does not distribute for a taxable year. In order to avoid a non-
deductible 4% federal excise tax, each Portfolio must distribute (or be deemed
to have distributed) by December 31 of each calendar year at least 98% of its
taxable ordinary income for such year, at least 98% of the excess of its capital
gains over its capital losses (generally computed on the basis of the one-year
period ending on October 31 of such year), and all taxable ordinary income and
the excess of capital gains over capital losses for the previous year that were
not distributed in such year and on which the Portfolio paid no federal income
tax.
Dividends paid by a Portfolio from taxable net investment income (including
income attributable to accrued market discount and a portion of the discount on
certain stripped tax-exempt obligations and their coupons) and the excess of net
short-term capital gain over net long-term capital loss will be treated as
ordinary income in the hands of unitholders. Such distributions will not
qualify for the corporate dividends-received deduction. Dividends paid by a
Portfolio from the excess of net long-term capital gain (if any) over net short-
term capital loss are taxable to unitholders as long-term capital gain,
regardless of the length of time the units of a Portfolio have been held by such
unitholders, and also will not qualify for the corporate dividends-received
deduction. A Portfolio's net realized capital gains for a taxable year are
computed by taking into account realized capital losses, including any capital
loss carryforward of that Portfolio.
Distributions paid by the Tax-Exempt Diversified, Tax-Exempt California and
Tax-Exempt New York Portfolios from tax-exempt interest received by them and
properly designated as "exempt-interest dividends" will generally be exempt from
regular federal income tax, provided that at least 50% of the value of the
applicable Portfolio's total assets at the close of each quarter of its taxable
year consists of tax-exempt obligations, i.e., obligations described in Section
- -
103(a) of the Code (not including units of other regulated investment companies
that may pay exempt-interest dividends, because such units are not treated as
tax-exempt obligations for this purpose). Dividends paid by the other
Portfolios from any tax-exempt interest they may receive will not be tax-exempt,
because they will not satisfy the 50% requirement described in the preceding
sentence. A portion of any
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<PAGE>
tax-exempt distributions attributable to interest on certain "private activity
bonds," if any, received by a Portfolio may constitute a tax preference items
and may give rise to, or increase liability under, the alternative minimum tax
for particular unitholders. In addition, tax-exempt distributions of the
Portfolios may be considered in computing the "adjusted current earnings"
preference item of their corporate unitholders in determining the corporate
alternative minimum tax. To the extent that the Tax-Exempt Diversified, Tax-
Exempt California and Tax-Exempt New York Portfolios invest in certain short-
term instruments, including repurchase agreements, the interest on which is not
exempt from Federal income tax, or earn other taxable income any distributions
of income from such investments or other taxable income will be taxable to
unitholders as ordinary income. All or substantially all of any interest on
indebtedness incurred directly or indirectly to purchase or carry units of the
Portfolio will generally not be deductible. The availability of tax-exempt
obligations and the value of the Portfolios may be affected by restrictive tax
legislation enacted in recent years.
In purchasing municipal obligations, the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios rely on opinions of nationally-
recognized bond counsel for each issue as to the excludability of interest on
such obligations from gross income for federal income tax purposes and, where
applicable, the tax-exempt nature of such interest under the personal income tax
laws of a particular state. These Portfolios do not undertake independent
investigations concerning the tax-exempt status of such obligations, nor do they
guarantee or represent that bond counsels' opinions are correct.
Distributions of net investment income and net realized capital gains will be
taxable as described above, whether received in units or in cash. Unitholders
electing to receive distributions in the form of additional units will have a
cost basis in each unit so received equal to the amount of cash they would have
received had they elected to receive cash.
Certain Portfolios may be subject to foreign withholding taxes or other
foreign taxes with respect to their investments in certain securities of foreign
entities. These taxes may be reduced or eliminated under the terms of
applicable U.S. income tax treaties in some cases, and each Portfolio intends to
satisfy any procedural requirements to qualify for benefits under these
treaties. Although no Portfolio anticipates that more than 50% of the value of
its total assets at the close of a taxable year will be composed of securities
of foreign corporations, if the 50% requirement were satisfied by a portfolio,
that a Portfolio could make an election under Code Section 853 to permit its
unitholders to claim a credit or deduction on their federal income tax returns
for their pro rata portion of qualified taxes paid by that Portfolio in foreign
countries. In the event such an election is made, unitholders will be required
to include their pro rata share of such taxes in gross income and may be
entitled to claim a foreign tax credit or deduction with respect to such taxes,
subject to certain
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<PAGE>
limitations under the Code. Unitholders who are precluded from taking such
credits or deductions will nevertheless be taxed on their pro rata share of the
foreign taxes included in their gross income, unless they are otherwise exempt
from federal income tax.
Each Portfolio will be required to report to the Internal Revenue Service all
taxable distributions, except in the case of certain exempt unitholders. Under
the backup withholding provisions of Code Section 3406, all such distributions
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt unitholders who fail to furnish the Portfolio with their
taxpayer identification number and with certain certifications required by the
Internal Revenue Service or if the Internal Revenue Service or a broker notifies
a Portfolio that the number furnished by the unitholder is incorrect or that the
unitholder is subject to backup withholding as a result of failure to report
interest or dividend income. However, any taxable distributions from the Tax-
Exempt Diversified, Tax-Exempt California and Tax-Exempt New York Portfolios
will not be subject to backup withholding if the applicable Portfolio reasonably
estimates that at least 95% of its distributions will be exempt-interest
dividends. The Portfolios may refuse to accept an application that does not
contain any required taxpayer identification number or certification that the
number provided is correct, if applicable, or that the investor is an exempt
recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in units, will be reduced by
the amounts required to be withheld. Investors may wish to consult their tax
advisers about the applicability of the backup withholding provisions.
Redemptions (including exchanges) and other dispositions of units in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Portfolios successfully
maintain a constant net asset value per share, but a loss may be recognized to
the extent a CDSC is imposed on the redemption or exchange of ILA Class B Units.
All or a portion of such a loss may be disallowed under applicable code
provisions in certain circumstances. Unitholders should consult their own tax
advisors with reference to their circumstances to determine whether a
redemption, exchange, or other disposition of Portfolio Units is properly
treated as a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
units or cash, must be reported by each unitholder who is required to file a
federal income tax return. The Portfolios will inform unitholders of the
federal income tax status of their distributions after the end of each calendar
year, including, in the case of the Tax-Exempt Diversified, Tax-Exempt
California and Tax-Exempt New York Portfolios, the amounts that qualify as
exempt-interest dividends and any portions of such amounts that constitute tax
preference items under the federal alternative minimum tax. Unitholders who
receive exempt-interest dividends and have not held their units of the
applicable Portfolio for its entire taxable year may have designated as tax-
exempt or as
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a tax preference item a percentage of their distributions which is not exactly
equal to a proportionate share of the amount of tax-exempt interest or tax
preference income earned during the period of their investment in such
Portfolio. Each unitholder should consult his or her own tax advisor to
determine the tax consequences of an investment in a Portfolio in the
unitholder's own state and locality.
Different tax treatment, including penalties on certain excess contributions
and deferrals, certain pre-retirement and post-retirement distributions, and
certain prohibited transactions is accorded to accounts maintained as qualified
retirement plans. Unitholders should consult their tax advisers for more
information.
The foregoing discussion relates solely to U.S. federal income tax law as it
applies to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies and financial
institutions. Each unitholder who is not a U.S. person should consult his or
her tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of
units of a Portfolio, including the possibility that such a unitholder may be
subject to a U.S. nonresident alien withholding tax at a rate of 30% (or at a
lower rate under an applicable U.S. income tax treaty) on certain distributions
from a Portfolio and, if a current IRS Form W-8 or acceptable substitute is not
on file with the Portfolio, may be subject to backup withholding on certain
payments.
STATE AND LOCAL
The Portfolios may be subject to state or local taxes in jurisdictions in
which the Portfolios may be deemed to be doing business. In addition, in those
states or localities which have income tax laws, the treatment of a Portfolio
and its unitholders under such laws may differ from their treatment under
Federal income tax laws, and an investment in the Portfolios may have tax
consequences for unitholders that are different from those of a direct
investment in the Portfolios' securities. Unitholders should consult their own
tax advisers concerning these matters. For example, in such states or
localities it may be appropriate for unitholders to review with their tax
advisers the state income and, if applicable, intangible property tax
consequences of investments by the Portfolios in securities issued by the
particular state or the U.S. Government or its various agencies or
instrumentalities, because many states (i) exempt from personal income tax
distributions made by regulated investment companies from interest on
obligations of the particular state or on direct U.S. Government obligations
and/or (ii) exempt from intangible property tax the value of the units of such
companies attributable to such obligations, subject to certain state-specific
requirements and/or limitations. See also the discussion below of these
applicable provisions in California and New York.
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Provided that the Portfolios qualify as regulated investment companies and
incur no federal income tax liability, the Portfolios may still be subject to
New York State and City minimum taxes, which are small in amount.
California State Taxation. The following discussion of California tax law
assumes that the Tax-Exempt California Portfolio will be qualified as a
regulated investment company under Subchapter M of the Code and will be
qualified thereunder to pay exempt-interest dividends. The Tax-Exempt
California Portfolio intends to qualify for each taxable year under California
law to pay "exempt interest dividends" which will be exempt from the California
personal income tax.
Individual unitholders of the Tax-Exempt California Portfolio who reside in
California will not be subject to California personal income tax on
distributions received from the Portfolio to the extent such distributions are
exempt-interest dividends 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
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as long-term capital loss to the extent of such long-term capital gains
distribution. Finally, any loss realized upon the redemption of units within
thirty days before or after the acquisition of other units of the same Portfolio
may be disallowed under the "wash sale" rules.
New York City and State Taxation. Individual unitholders who are residents
of New York State will be able to exclude for New York State income tax purposes
that portion of the exempt-interest dividends properly designated as such from
the Tax-Exempt New York Portfolio which is derived from interest on obligations
of New York State and its political subdivisions and obligations of Puerto Rico,
the U.S. Virgin Islands and Guam. Exempt- interest dividends may be properly
designated as such only if, as anticipated, at least 50% of the value of the
assets of the Portfolio are invested at the close of each quarter of its taxable
year in obligations of issuers the interest on which is excluded from gross
income for federal income tax purposes. Individual unitholders who are
residents of New York City will also be able to exclude such income for New York
City income tax purposes. Interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Tax-Exempt New York Portfolio is
not deductible for New York State or New York City personal income tax purposes.
Long-term capital gains, if any, that are distributed by the Tax-Exempt New
York Portfolio and are properly designated as capital gain dividends will be
treated as capital gains for New York State and City income tax purposes in the
hands of New York State and New York City residents.
Unitholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
This discussion of the tax treatment of the Portfolio and its unitholders is
based on the tax laws in effect as of the date of this Statement of Additional
Information.
ORGANIZATION AND CAPITALIZATION
The Portfolios were reorganized from series of a Massachusetts business Trust
as part of Goldman Sachs Trust, a Delaware business trust, by a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of units exists,
each class or series must be preferred over all other classes or series in
respect of assets specifically allocated to such class or series. The Trustees
also have authority to classify and reclassify any series of units into one or
more classes of units. As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of up to three classes of
units of each of the Portfolios: ILA Units, ILA Administration Units and ILA
Service Units. In addition, the Trustees have
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authorized a fourth 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 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
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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, if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding units of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
When issued units are fully paid and non-assessable. In the event of
liquidation, unitholders are entitled to share pro rata in the net assets of the
applicable class of the relevant Portfolio available for distribution to such
unitholders. All units entitle their holders to one vote per unit, are freely
transferable and have no preemptive subscription or conversion rights.
The Trust is not required to hold annual meetings of unitholders and does not
intend to hold such meetings. In the event that a meeting of unitholders is
held, each unit of the Trust will be entitled, as determined by the Trustees,
either to one voter for each unit or to one vote for each dollar of net asset
value represented by such units on all matters presented to unitholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote separately
from each other. Unitholders of the Trust do not have cumulative voting rights
in the election of Trustees. Meetings of unitholders of the Trust, or any
series or class thereof, may be called by the Trustees, certain officers or upon
the written request of holders of 10% or more of the units entitled to vote at
such meetings. The unitholders of the Trust will have voting rights only with
respect to the limited number of matters specified in the Declaration of Trust
and such other matters as the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers
and agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of
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any series is held personally liable solely by reason of being or having been a
shareholder and not because of the shareholder's acts or omissions or for some
other reason, the shareholder or former shareholder (or heirs, executors,
administrators, legal representatives or general successors) shall be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust acting on behalf of any affected series, must, upon
request by such shareholder, assume the defense of any claim made against such
shareholder for any act or obligation of the series and satisfy any judgment
thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series
or classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Prime Obligations Portfolio were
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Duquesne Capital Management, Inc., 2579 Washington Rd. Ste. 322, Pittsburgh, PA
15241-2563 (5.45%); Harris Trust & Savings Bank, 200 W. Monroe Street, 12th
Floor, Chicago, IL 60606-5509 (8.36%); United Missouri Bank of Kansas City, PO
Box 419692, Kansas City 64141-6692 (5.63%); and VF Corporation, 1047 North Park
Road, Wyomissing, PA 19610 (6.85%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Money Market Portfolio were Bank of New York, 48 Wall
Street, New York, NY 10286 (20.40%) and Stone Street & Bridge Street Funds, 85
Broad Street, 4th Floor, New York, NY 10004-2434 (9.52%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Obligations Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (6.83%); Bankers Trust
Company, PO Box 897, Des Moines, IA 50304-0897 (5.98%); First National Bank of
Omaha, PO Box 3128, Omaha, NE 68103-0128 (15.24%; Firstar Bank Madison, N.A.,
PO Box 7900, Madison, WI 53707-7900 (8.18%) and National City Bank Kentucky,
4100 W. 150th Street, 3rd Floor N. Annex, Cleveland, OH 44135 (7.485%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Treasury Instruments Portfolio were Bank of New York
(NCD), 1 Wall Street, 5th Floor, New York, NY 10286-0001 (32.49%); Emerald
Partners, 237 Park Avenue Ste. 801, New York, NY 10017-3142 (5.18%); and Morgan
Stanley, 2 No. LaSalle Street, Ste. 500, Chicago, IL 60602 (7.48%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Government Portfolio were American Exploration Co.,
1331 Lamar Street, Ste. 900, Houston, TX 77010-3027 (9.82%); Comerica Bank, PO
Box 55-519, Detroit, MI 48255-0499 (11.06%); Morgan Stanley, 2 No. LaSalle
Street, Ste. 500, Chicago, IL 60602 (7.86%); Northern Trust, 50 South LaSalle
Street, Chicago, IL 60675 (6.43%); State Street Bank & Trust Co., PO Box 1992,
Boston, MA 02105-1992 (6.55%); United Missouri Bank of Kansas City, PO Box
419692, Kansas City, MO 64141-6692 (5.19%); and Wells Fargo Bank, 26610 Agoura
Rd., Calabasas, CA 91302-1954 (7.00%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt New York Portfolio were Bank of New York, 48
Wall Street, New York, NY 10286 (20.62%); Marine Midland Bank, PO Box 4203,
Buffalo, NY 14240 (7.48%); Shames Trust Accounts, 57 Holly Place, Briarcliff,
NY 10510-2107 (9.01%) and Stephen Apkon & Lisa Hertz Apkon, 33 Ashland Ave.,
Pleasantville, NY 10570-2301 (8.36%).
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Tax-Exempt California Portfolio were Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee & Reiko-
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Takahashi Joint Tenants, 26541 Taaffe Road, Los Altos, CA 94022-4313.
As of April 1, 1997, the only holders of record of 5% or more of the
outstanding units of the Federal Portfolio was Bank of New York, 48 Wall Street,
New York, NY 10286 (10.46%); and The Baupost Group, Inc., PO Box 389125,
Cambridge, MA 02238-9998 (5.95%).
As of April 1, 1997, the only holders of record of 5% of more of the
outstanding units of the Tax-Exempt Diversified Portfolio was Bodri Capital
Management, Inc., 525 University Ave., Ste. 1322, Palo Alto, CA 94301 (5.26%);
and Chong-Moon Lee, Los Altos, CA 94022-4313 (5.45%).
UNITHOLDER AND TRUSTEE LIABILITY
Under Delaware law, the unitholders of the Portfolios are not generally
subject to liability for the debts or obligations of the Trust. Similarly,
Delaware law provides that a series of the Trust will not be liable for the
debts or obligations of any other series of the Trust. However, no similar
statutory or other authority limiting business trust unitholder liability exists
in many other states. As a result, to the extent that a Delaware business trust
or a unitholder is subject to the jurisdiction of courts of such other states,
the courts may not apply Delaware law and may thereby subject the Delaware
business trust unitholders to liability. To guard against this risk, the
Declaration of Trust contains express disclaimer of unitholder liability for
acts or obligations of a Portfolio. Notice of such disclaimer will normally be
given in each agreement, obligation or instrument entered into or executed by a
Portfolio or the Trustees. The Declaration of Trust provides for indemnification
by the relevant Portfolio for all loss suffered by a unitholder as a result of
an obligation of the Portfolio. The Declaration of Trust also provides that a
Portfolio shall, upon request, assume the defense of any claim made against any
unitholder for any act or obligation of the Portfolio and satisfy any judgment
thereon. In view of the above, the risk of personal liability of unitholders is
remote.
In addition to the requirements set forth under the Declaration of Trust, the
Trust provides that unitholders may bring a derivative action on behalf of the
Trust only if the following conditions are met: (a) unitholders eligible to
bring such derivative action under Delaware law who hold at least 10% of the
outstanding units of the Portfolio, or 10% of the outstanding units of the class
to which such action relates, shall join in the request for the Trustees to
commence such action; and (b) the Trustees must be afforded a reasonable amount
of time to consider such unitholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain counsel or other advisers in
considering the merits of the request and shall require an undertaking by the
Unitholders making such request to
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reimburse the Portfolio for the expense of any such advisers in the event that
the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the Portfolios' assets. In that capacity, State Street maintains
the accounting records and calculates the daily net asset value per unit of the
Portfolios. Its mailing address is P.O. Box 1713, Boston, MA 02105. State
Street has appointed The Northern Trust Company, 50 South LaSalle Street,
Chicago, Illinois 60675 as subcustodian to hold cash and certain securities
purchased by the Trust.
INDEPENDENT ACCOUNTANTS
Arthur Andersen LLP, independent public accountants, One International Place,
Boston, MA 02110, have been selected as auditors of the Trust. In addition to
audit services, Arthur Andersen LLP prepares the Trust's federal and state tax
returns, and provides consultation and assistance on accounting, internal
control and related matters.
FINANCIAL STATEMENTS
The Financial Statements of the Portfolios, including the Statements of
Investments as of December 31, 1996, the Statements of Assets and Liabilities as
of December 31, 1996, the related Statements of Operations for the period then
ended, the Statements of Changes in Net Assets and the Financial Highlights for
the periods presented, the Notes to the Financial Statements, and the Report of
Independent Public Accountants, all of which are included in the 1996 Annual
Report to the unitholders, are attached hereto and incorporated by reference
into this Statement of Additional Information.
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SERVICE PLAN
(ILA Service Units Only)
The Trust, on behalf of each Portfolio, has adopted a service plan (the
"Plan") with respect to the ILA Service Units which authorizes the Portfolios to
compensate Service Organizations for providing certain account administration
and personal account maintenance services to their customers who are or may
become beneficial owners of such units. Pursuant to the Plan, the Trust, on
behalf of each Portfolio, enters into agreements with Service Organizations
which purchase ILA Service Units on behalf of their customers ("Service
Agreements"). Under such Service Agreements the Service Organizations may: (a)
act, directly or through an agent, as the sole unitholder of record and nominee
for all customers, (b) maintain account records for each customer who
beneficially owns ILA Service Units, (c) answer questions and handle
correspondence from customers regarding their accounts, (d) process customer
orders to purchase, redeem and exchange ILA Service Units, and handle the
transmission of funds representing the customers' purchase price or redemption
proceeds, (e) issue confirmations for transactions in units by customers, (f)
provide facilities to answer questions from prospective and existing investors
about ILA Service Units, (g) receive and answer investor correspondence,
including requests for prospectuses and statements of additional information,
(h) display and make prospectuses available on the Service Organization's
premises, (i) assist customers in completing application forms, selecting
dividend and other account options and opening custody accounts with the Service
Organization, and (j) act as liaison between customers and the Trust, including
obtaining information from the Trust, working with the Trust to correct errors
and resolve problems and providing statistical and other information to the
Trust. As compensation for such services, the Trust on behalf of each Portfolio
pays each Service Organization a service fee in an amount up to .40% (on an
annualized basis) of the average daily net assets of the ILA Service Units of
each Portfolio attributable to or held in the name of such Service Organization
for its customers; provided, however, that the fee paid for personal and account
maintenance services shall not exceed .25% of such average daily net assets.
For the fiscal years ended December 31, 1996, December 31, 1995 and
December 31, 1994, the amount of the service fees paid by each Portfolio then in
existence to Service Organizations was as follows:
1996 1995 1994
---- ---- ----
Prime Obligations
Portfolio $ 494,274 $937,733 $630,669
Money Market Portfolio 128,313 102,642 82,267
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Treasury Obligations
Portfolio $ 579,790 4478,419 4435,536
Treasury Instruments
Portfolio 1,266,586 1316,188 1187,470
Government Portfolio 352,931 6430,114 6603,447
Federal Portfolio 562,023 254,508 34,415
Tax-Exempt Diversified
Portfolio 130,158 1220,790 1187,137
Tax-Exempt California
Portfolio/(1)/ -- -- --
Tax-Exempt New York
Portfolio/(1)/ -- -- --
- -----------------------------------
/(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 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
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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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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. For the fiscal year ended
December 31, 1996, the Prime Obligations Portfolio paid Goldman Sachs $128 under
the Service Plan with with respect to its 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
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their judgment there is a reasonable likelihood that the 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. For the fiscal year ended December 31, 1996, the Prime
Obligations Portfolio paid Goldman Sachs $382 under the Class B Plan.
The Class B Plan is a compensation plan which provides for the payment of a
specified distribution fee without regard to the distribution expenses actually
incurred by Goldman Sachs. If the Class B Plan were terminated by the Trust's
Board of Trustees and no successor plan were adopted, the Prime Obligations
Portfolio would cease to make distribution payments to Goldman Sachs and Goldman
Sachs would be unable to recover the amount of any of its unreimbursed
distribution expenditures.
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Under the Class B Plan, Goldman Sachs, as distributor of the Portfolio's
ILA Class B Units, will provide to the Board of Trustees for its review, and the
Board will review at least quarterly, a written report of the services provided
and amounts expended by Goldman Sachs under the Class B Plan and the purposes
for which such services were performed and expenditures were made.
The Class B Plan will remain in effect with respect to the Prime
Obligations Portfolio from year to year, provided such continuance is approved
annually by a majority vote of the Board of Trustees, including a majority of
the non-interested Trustees. The Class B Plan may not be amended to increase
materially the amount to be spent for the services described therein as to the
Prime Obligations Portfolio without approval of a majority of the outstanding
ILA Class B Unitholders of that Portfolio. All material amendments of the Class
B Plan must also be approved by the Board of Trustees of the Trust in the manner
described above. The Class B Plan may be terminated at any time without payment
of any penalty by a vote of the majority of the non-interested Trustees or by
vote of a majority of the ILA Class B Units of that Portfolio. So long as the
Class B Plan is in effect, the selection and nomination of non-interested
Trustees shall be committed to the discretion of the non-interested Trustees.
The Trustees have determined that in their judgment there is a reasonable
likelihood that the Class B Plan will benefit the Prime Obligations Portfolio
and its respective ILA Class B Unitholders.
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================================================================================
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ILA Unitholder Letter/Annual Report
- --------------------------------------------------------------------------------
Dear Unitholders:
We welcome this opportunity to provide you with a summary of the trends and
key events that affected the economy and the Goldman Sachs Institutional Liquid
Assets (ILA) Portfolios in 1996. It has been another positive year for ILA in
which the Portfolios did well compared with their respective IBC Financial Data,
Inc. averages while adhering to their conservative investment guidelines.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) reported at 2.0% annualized. Growth was more
dramatic during the second quarter, as industrial activity and automobile and
home sales all showed significant improvement, pushing real GDP to 4.7%, its
highest rate in two years. That growth rate caused some to expect the Fed to
change direction and tighten before year-end. However, the economy subsequently
moderated significantly, with third-quarter annualized real GDP retreating to
2.1%, reflecting lackluster consumer spending and a widening U.S. trade deficit.
As 1996 drew to a close, moderate economic growth and contained inflation kept
the Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
portfolios' weighted average maturities and structures were equally important to
our strategy.
During the second and third quarters of 1996, we extended the ILA
Portfolios' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Portfolios closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
ILA Unitholder Letter/Annual Report (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for ILA Portfolios Institutional Units* as of December 31, 1996
<TABLE>
<CAPTION>
---------------------------------------------------------
Weighted
Institutional SEC 7-Day SEC 7-Day 30-Day Average
Liquid Assets Current Effective Average Maturity
Portfolios Yield Yield Yield (days)
=========================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.12% 5.25% 5.10% 40
---------------------------------------------------------
Money Market 5.20% 5.33% 5.18% 43
---------------------------------------------------------
Government 5.19% 5.32% 5.07% 31
---------------------------------------------------------
Treasury
Obligations 5.19% 5.32% 5.06% 34
---------------------------------------------------------
Treasury
Instruments 4.84% 4.95% 4.98% 54
---------------------------------------------------------
Federal 5.15% 5.28% 5.12% 41
---------------------------------------------------------
Tax-Exempt
Diversified 3.58% 3.64% 3.30% 39
---------------------------------------------------------
Tax-Exempt
California 3.47% 3.53% 3.11% 34
---------------------------------------------------------
Tax-Exempt
New York 3.52% 3.58% 3.19% 34
---------------------------------------------------------
</TABLE>
* ILA offers three separate classes of units (Institutional, Administration and
Service), each of which is subject to different fees and expenses that affect
performance and entitle unitholders to different services. The Administration
units and the Service units offer financial institutions the opportunity to
receive a fee for providing administrative support services. The Administration
units pay 0.15% plus 0.10% from the adviser for a total of 0.25%. The Service
units pay 0.40% plus 0.10% from the adviser for a total of 0.50%. More complete
information, including management fees and expenses, is included in the ILA
Portfolios' prospectus or may be obtained by calling the Goldman Sachs Funds at
1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy
Economy and a Strong Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from
- --------------------------------------------------------------------------------
2
<PAGE>
the Orange County bankruptcy abated somewhat, although various forms of credit
enhancement remained popular, even among high-quality issuers. Reflecting the
strong national economy, many states and localities experienced positive
financial results, reducing their regular cash flow borrowings.
The Credit Picture Abroad: Europe Improved,
While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks. In Asia,
creditworthiness was fairly stable. The notable negative exception was the
Japanese financial sector, which remained under pressure from the ongoing
weakness of the real estate markets, sluggish economic growth and ongoing
deregulation. However, Japan's largest banks have strong fundamentals and will
continue to be important and dominant players in the global financial market.
Australian credit quality strengthened through improved macroeconomic balances,
which provided evidence that Australia's recent boom-and-bust cycles may be
over. The weakness of Asian exports did not affect creditworthiness directly;
exports should recover this year, and the scare could prompt salutary policy
adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market portfolios. The Goldman Sachs Credit Department, which has analysts based
in London, Tokyo, Frankfurt and New York, as well as extensive technological
assets and credit expertise, will continue to vigilantly monitor global
developments in 1997.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, ILA Portfolios will continue to be managed with
short-to-neutral average life targets and short, ddered structures to prepare
for higher rates ahead.
Extended Trading Hours Improve Service Further
On November 4, 1996, we extended the trading hours for the Institutional
Liquid Assets Federal and Treasury Instruments Portfolios to 3:00 p.m. EST. Many
clients have already taken advantage of this additional flexibility.
In closing, we thank you for your support and for making 1996 a successful
year for the ILA Portfolios. We are pleased that many of you have joined our
conference calls following each Federal Open Market Committee meeting throughout
the year. Our goal is to continue to provide you with competitive performance,
as well as a range of value-added services that reflect the breadth and depth of
Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
3
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Commercial Paper and Corporate Obligations--60.5%
Bank Holding Companies
BankAmerica Corp.
$50,000,000 5.27% 03/21/97 $ 49,421,764
Business Credit Institutions
General Electric Capital Corp.
20,000,000 5.30 03/26/97 19,752,667
30,000,000 5.44 04/03/97 29,582,933
JC Penney Funding Corp.
44,300,000 5.31 01/31/97 44,103,973
Chemicals
Bayer Corp.
25,000,000 5.33 03/13/97 24,737,201
Commercial Banks
CP Trust Certificates Series 1996
35,000,000 5.94/(a)/ 03/28/97 35,000,000
Life Insurance
Commonwealth Life Insurance Co.
55,000,000 6.11/(b)/ 05/08/97 55,000,000
Pacific Mutual Life Insurance Co.
25,000,000 5.52/(b)/ 02/28/97 25,000,000
Prudential Funding Corp.
40,000,000 5.42 01/29/97 39,831,378
Motor Vehicles and Equipment
Ford Motor Credit Corp.
20,000,000 5.50 01/28/97 19,917,500
Hertz Corporation
25,000,000 5.32 02/04/97 24,874,389
Personal Credit Institutions
Associates Corp.
50,000,000 5.32 01/29/97 49,793,111
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
20,000,000 5.43 01/29/97 19,915,533
Receivable/Asset Financings
Beta Finance Inc.
7,000,000 6.11 06/17/97 7,000,000
Delaware Funding Corp.
30,000,000 5.29 02/20/97 29,779,583
Enterprise Funding Corp.
10,062,000 5.33 01/21/97 10,032,205
9,103,000 5.33 01/23/97 9,073,350
International Lease Finance Corp.
9,000,000 5.29% 03/24/97 $ 8,891,555
30,000,000 5.32 04/04/97 29,587,700
New Center Asset Trust
10,000,000 5.52 01/28/97 9,958,600
10,000,000 5.37 04/04/97 9,861,275
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
40,000,000 5.30 02/13/97 39,746,778
10,000,000 5.34 03/12/97 9,896,167
C.S. First Boston, Inc.
15,000,000 5.33 01/22/97 14,953,363
Merrill Lynch & Co., Inc.
10,000,000 5.45 02/19/97 9,925,819
40,000,000 5.33 02/26/97 39,668,356
Morgan Stanley Group, Inc.
10,000,000 5.59 01/28/97 9,958,075
15,000,000 5.32 02/06/97 14,920,200
25,000,000 5.79/(a)/ 06/27/97 25,000,000
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $764,666,253
- -----------------------------------------------------------
Bank Notes--10.7%
Colorado National Bank
$25,000,000 5.59%/(b)/ 01/15/97 $ 24,999,810
FCC National Bank
15,000,000 5.70 05/22/97 14,982,722
20,000,000 6.00 06/02/97 20,000,808
Huntington National Bank
25,000,000 6.05 06/13/97 25,014,637
PNC Bank, N.A.
40,000,000 5.58/(b)/ 04/01/97 39,992,313
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
- -----------------------------------------------------------
Total Bank Notes $134,990,290
- -----------------------------------------------------------
U.S. Government Agency Obligations--1.6%
Federal National Mortgage Association
$20,400,000 5.36% 03/12/97 $ 20,187,386
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $ 20,187,386
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
4
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Prime Obligations Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit--9.5%
Chase Manhattan Corp.
$ 10,000,000 5.75% 02/03/97 $ 10,000,000
40,000,000 5.42 03/12/97 40,000,000
First Alabama Bank
20,000,000 5.55 02/28/97 19,999,973
Mellon Bank, N.A.
40,000,000 5.35 02/19/97 40,000,000
Union Bank of California
10,000,000 5.58 02/28/97 10,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 119,999,973
- -----------------------------------------------------------
Repurchase Agreements--17.9%
C.S. First Boston Corp., dated 12/31/96, repurchase
price $50,465,000 (FNMA: $51,588,373, 6.12%-6.23%,
02/01/32-10/01/32)
$ 50,000,000 5.40% 03/03/97 $ 50,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $100,036,111 (U.S. Treasury Bond: $53,861,960,
11.25%, 02/15/15; FHLB Stripped Security:
$48,746,508, 06/23/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $25,213,750 (FNMA: $9,152,917, 7.50%,
04/01/26; FHLMC: $17,073,692, 7.50%, 11/01/26)
25,000,000 5.40 02/26/97 25,000,000
Smith Barney, Inc., dated 12/31/96, repurchase price
$30,257,450 (FHLMC: $31,328,053, 7.00%,
06/01/26-11/01/26)
30,000,000 5.42 02/26/97 30,000,000
Joint Repurchase Agreement Account
21,400,000 6.58 01/02/97 21,400,000
- -----------------------------------------------------------
Total Repurchase Agreements $ 226,400,000
- -----------------------------------------------------------
Total Investments $1,266,243,902/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Money Market Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
Commercial Paper and Corporate Obligations--48.5%
Business Credit Institutions
General Electric Capital Corp.
$15,000,000 5.44% 04/03/97 $ 14,791,467
Commercial Banks
CP Trust Certificates Series 1996
20,000,000 5.68/(a)/ 03/28/97 20,000,000
Computer Software and Services
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
Banca Crt Financial Corp.
10,000,000 5.35 01/22/97 9,968,792
5,000,000 5.35 01/31/97 4,977,708
17,430,000 5.45 03/03/97 17,269,039
5,400,000 5.42 04/03/97 5,325,204
Generale Bank
15,000,000 5.35 04/10/97 14,779,313
San Paolo U.S. Finance Co.
25,000,000 5.36 01/31/97 24,888,333
15,000,000 5.33 02/13/97 14,904,504
Unifunding, Inc.
40,000,000 5.45 01/29/97 39,830,444
Home Builders
International Lease Finance Corp.
40,000,000 5.43 03/07/97 39,607,833
Life Insurance
Commonwealth Life Insurance Co.
25,000,000 5.64/(b)/ 05/08/97 25,000,000
Prudential Funding Corp.
10,000,000 5.42 01/29/97 9,957,844
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
25,000,000 5.35 03/25/97 24,691,631
Ford Motor Credit Co.
40,000,000 5.32 02/04/97 39,799,022
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
35,000,000 5.30 02/13/97 34,778,431
Merrill Lynch & Co., Inc.
40,000,000 5.35 02/11/97 39,756,278
Morgan Stanley Group, Inc.
20,000,000 5.32 02/06/97 19,893,600
20,000,000 5.53/(a)/ 06/27/97 20,000,000
Nomura Holdings
35,000,000 5.39 01/29/97 34,853,272
- -----------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $479,913,854
- -----------------------------------------------------------
Bank Notes--15.1%
Colorado National Bank
$15,000,000 5.59%/(b)/ 01/15/97 $ 14,999,886
Dakota Certificates of Standard Credit Card Master Trust
20,000,000 5.33/(b)/ 02/07/97 19,890,439
FCC National Bank, Wilmington
10,000,000 5.70 05/22/97 9,988,481
First Bank FSB
5,000,000 5.61/(b)/ 04/11/97 4,999,734
First National Bank of Maryland
5,000,000 5.60/(b)/ 09/30/97 4,998,547
Huntington National Bank
5,000,000 6.05 06/13/97 4,998,229
PNC Bank, N.A.
10,000,000 5.58/(b)/ 04/01/97 9,998,078
20,000,000 5.40/(b)/ 10/01/97 19,988,244
Society National Bank of Cleveland
25,000,000 5.58/(b)/ 05/14/97 24,990,309
SMM Trust 1996
10,000,000 5.69/(b)/ 06/20/97 10,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54/(b)/ 05/15/97 24,995,313
- -----------------------------------------------------------
Total Bank Notes $149,847,260
- -----------------------------------------------------------
Certificates of Deposit--0.5%
Chase Manhattan Corp.
$ 5,000,000 5.75% 02/03/97 $ 5,000,000
- -----------------------------------------------------------
Total Certificates of Deposit $ 5,000,000
- -----------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$40,000,000 5.49% 03/18/97 $ 40,000,830
Sanwa Bank Ltd., London
35,000,000 5.46 03/21/97 35,000,377
- -----------------------------------------------------------
Total Certificates of Deposit - Foreign
Eurodollar $ 75,001,207
- -----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ----------------------------------------------------------
ILA Money Market Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Certificates of Deposit - Yankeedollar--9.1%
Industrial Bank of Japan, New York
$35,000,000 5.46% 03/19/97 $ 35,000,368
Landesbank Hessen Thuer Gir, New York
30,000,000 6.03 06/13/97 30,036,531
Sumitomo Bank, Los Angeles
25,000,000 5.52 02/28/97 24,998,171
- -----------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 90,035,070
- -----------------------------------------------------------
Taxable Municipal Notes--2.9%
Florida Housing Finance Authority
$28,800,000 5.92%/(b)/ 01/01/34 $ 28,800,000
- -----------------------------------------------------------
Total Taxable Municipal Notes $ 28,800,000
- -----------------------------------------------------------
Time Deposit--3.6%
Bank of Tokyo, Mitsubishi Bank Ltd.
$35,000,000 5.50% 05/16/97 $ 35,000,000
- -----------------------------------------------------------
Total Time Deposit $ 35,000,000
- -----------------------------------------------------------
Repurchase Agreements--12.9%
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $50,018,056 (FHLMC: $52,044,149, 7.26%,
09/17/01)
$50,000,000 6.50% 01/02/97 $ 50,000,000
Joint Repurchase Agreement Account
77,200,000 6.58 01/02/97 77,200,000
- -----------------------------------------------------------
Total Repurchase Agreements $127,200,000
- -----------------------------------------------------------
Total Investments $990,797,391/(c)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
One month commercial paper
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Government Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
U.S. Government Agency Obligations--31.2%
Federal Home Loan Bank
$ 25,000,000 5.35% 01/30/97 $ 24,892,257
50,000,000 5.40/(a)/ 04/04/97 49,988,154
25,000,000 5.45 11/12/97 24,977,221
10,000,000 5.42 12/02/97 9,986,619
25,000,000 5.50/(a)/ 12/26/97 24,979,592
Federal National Mortgage Association
30,000,000 6.50 01/02/97 29,994,583
15,000,000 4.72/(a)/ 01/27/97 14,999,007
20,000,000 5.41/(a)/ 09/29/97 19,992,616
7,500,000 5.53 10/29/97 7,497,075
50,000,000 5.40/(a)/ 12/03/97 49,968,600
- -----------------------------------------------------------
Total U.S. Government Agency Obligations $257,275,724
- -----------------------------------------------------------
U.S. Treasury Obligations--3.0%
United States Treasury Notes
$ 20,000,000 5.63% 06/30/97 $ 19,965,941
5,000,000 6.00 09/02/97 4,999,214
- -----------------------------------------------------------
Total U.S. Treasury Obligations $ 24,965,155
- -----------------------------------------------------------
Repurchase Agreements--66.1%
Bear Stearns Companies, Inc. dated 12/31/96, repurchase
price $30,011,333 (FNMA: $30,894,721, 8.50%, 09/01/25)
$ 30,000,000 6.80% 01/02/97 $30,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase
price $30,403,125 (FHLM: $31,559,521, 7.00%, 11/01/26)
30,000,000 5.38 03/11/97 30,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$30,011,500 (U.S. Treasury Bill: $30,600,013, 11/13/97)
30,000,000 6.90 01/02/97 30,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$30,403,125 (FNMA: $30,964,228, 6.12%, 10/01/32)
30,000,000 5.38 03/11/97 30,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase
price $30,403,125 (FNMA: $31,531,603, 8.00%, 06/01/26)
30,000,000 5.38 03/12/97 30,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (U.S. Treasury Stripped
Security: $22,193,561, 11/15/99; U.S. Treasury
Notes: $8,408,442, 7.75%-8.88%, 2/15/00-2/15/01)
30,000,000 7.10 01/02/97 30,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $30,011,833 (FNMA: $30,385,501, 5.28%,
06/01/24)
30,000,000 7.10 01/02/97 30,000,000
Repurchase Agreements (continued)
Nomura Securities International, Inc., dated 12/31/96,
repurchase price $30,012,500 (FHLM: $30,924,339,
6.50%-8.00%, 01/01/00-09/01/11)
$ 30,000,000 7.50% 01/02/97 $ 30,000,000
Joint Repurchase Agreement Account
305,000,000 6.58 01/02/97 305,000,000
- -----------------------------------------------------------
Total Repurchase Agreements $545,000,000
- -----------------------------------------------------------
Total Investments $827,240,870/(b)/
===========================================================
/(a)/Variable rate security-base index is one of the following:
Federal Funds
Prime lending rate
One month LIBOR
/(b)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Treasury Obligations Portfolio
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
<S> <C> <C> <C>
U.S. Treasury Obligations--9.6%
United States Treasury Notes
$40,000,000 5.63% 06/30/97 $39,932,792
27,500,000 5.38 12/01/97 27,459,792
10,000,000 5.25 12/31/97 9,975,384
- -----------------------------------------------------------
Total U.S. Treasury Obligations $77,367,968
- -----------------------------------------------------------
Repurchase Agreements--90.8%
Bear Stearns Companies Inc., dated 12/31/96, repurchase
price $35,013,125 (U.S. Treasury Note: $35,659,606,
8.75%, 8/15/00)
$35,000,000 6.75% 01/02/97 $35,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$30,399,750 (U.S. Treasury Note: $30,748,620, 7.50%,
11/15/01)
30,000,000 5.33 03/13/97 30,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase
price $35,013,028 (U.S. Treasury Bond: $35,702,267,
8.50%, 02/15/20)
35,000,000 6.70 01/02/97 35,000,000
Daiwa Securities, dated 12/31/96, repurchase price
$35,013,417 (U.S. Treasury Bill: $35,700,492, 11/13/97)
35,000,000 6.90 01/02/97 35,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$35,012,833 (U.S. Treasury Note: $35,700,497, 7.25%,
02/15/98)
35,000,000 6.60 01/02/97 35,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase
price $35,012,833 (U.S. Treasury Note: $35,838,260,
7.38%, 11/15/97)
35,000,000 6.60 01/02/97 35,000,000
Lehman Government Securities, Inc., dated 12/31/96,
repurchase price $35,013,806 (U.S. Treasury Stripped
Securities: $35,703,063, 02/15/00-11/15/00)
35,000,000 7.10 01/02/97 35,000,000
Merrill Lynch Government Securities, Inc., dated
12/31/96, repurchase price $35,012,542 (U.S. Treasury
Stripped Securities: $35,702,128, 02/15/02-02/15/26)
35,000,000 6.45 01/02/97 35,000,000
Nomura Securities International, Inc., dated 12/12/96,
repurchase price $30,400,500 (U.S. Treasury Notes:
$30,600,339, 5.13%-8.50%, 04/15/97-08/15/01)
30,000,000 5.34 03/12/97 30,000,000
Sanwa Securities, dated 12/31/96, repurchase price
$35,013,125 (U.S. Treasury Note: $36,039,356, 8.50%,
2/15/00)
35,000,000 6.75 01/02/97 35,000,000
Smith Barney Inc., dated 12/11/96, repurchase price
$30,400,500 (U.S. Treasury Notes: $28,942,094,
5.38%-6.88%, 05/15/97-07/31/99; U.S. Treasury Stripped
Security: $1,658,209, 02/15/00)
30,000,000 5.34 03/11/97 30,000,000
UBS Securities Inc., dated 12/31/96, repurchase price
$35,013,368 (U.S. Treasury Note: $35,676,249, 6.00%,
09/30/98)
35,000,000 6.88 01/02/97 35,000,000
Joint Repurchase Agreement Account
327,900,000 6.58 01/02/97 327,900,000
- -----------------------------------------------------------
Total Repurchase Agreements $732,900,000
- -----------------------------------------------------------
Total Investments $810,267,968/(a)/
===========================================================
</TABLE>
/(a)/The amount stated also represents aggregate cost for
federal income tax purposes.
Interest rates represent either the stated coupon rate,
annualized yield on date of purchase for discounted notes,
or, for floating rate securities, the current reset rate,
which is based upon current interest rate indices.
The percentages shown for each investment category reflect
the value of investments in that category as a percentage
of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Treasury Instruments Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Treasury Obligations--99.3%
United States Treasury Bills
$25,000,000 4.72% 01/30/97 $ 24,904,944
5,500,000 4.95 01/30/97 5,478,069
75,000,000 4.80 02/06/97 74,640,000
48,600,000 4.83 02/06/97 48,365,262
14,500,000 4.86 02/06/97 14,429,530
32,100,000 5.41 02/06/97 31,942,389
90,000,000 4.95 02/06/97 89,554,500
75,000,000 4.82 02/13/97 74,568,208
150,000,000 5.03 02/13/97 149,098,792
10,500,000 4.86 02/27/97 10,419,203
21,500,000 4.90 02/27/97 21,333,196
28,400,000 4.94 02/27/97 28,177,865
United States Treasury Notes
30,000,000 6.25 01/31/97 30,025,345
50,000,000 7.50 01/31/97 50,097,656
50,000,000 4.75 02/18/97 49,961,310
312,000,000 6.88 02/28/97 312,866,648
205,000,000 6.63 03/31/97 205,703,323
- ------------------------------------------------------------
Total U.S. Treasury Obligations $1,221,566,240
- ------------------------------------------------------------
Total Investments $1,221,566,240/(a)/
============================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Federal Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
U.S. Government Agency Obligations--100.3%
Federal Farm Credit Bank
$ 20,515,000 5.36% 01/02/97 $ 20,511,946
37,635,000 5.58 01/06/97 37,605,833
2,400,000 5.58 01/07/97 2,397,767
27,300,000 5.26-5.27 01/13/97 27,252,072
36,345,000 5.35 01/15/97 36,269,382
56,000,000 5.37 01/21/97 55,832,933
42,000,000 5.37 01/23/97 41,862,170
9,750,000 5.50 01/27/97 9,711,271
11,490,000 5.48 01/31/97 11,437,529
212,210,000 5.23-5.41/(a)/ 02/03/97 212,075,061
44,895,000 5.21 02/04/97 44,674,092
24,000,000 5.33 02/06/97 23,872,080
20,545,000 5.21-5.33 02/10/97 20,424,201
10,000,000 5.20 02/14/97 9,936,444
79,055,000 5.21-5.39 02/18/97 78,494,540
14,830,000 5.22 02/21/97 14,720,332
50,635,000 5.21-5.33 02/26/97 50,216,604
17,000,000 5.21 02/27/97 16,859,764
16,000,000 5.21 02/28/97 15,865,698
51,610,000 5.22-5.32 03/03/97 51,423,313
8,000,000 5.32 03/10/97 7,919,609
7,180,000 5.21 03/11/97 7,108,302
50,000,000 5.48/(b)/ 03/11/97 49,992,224
6,200,000 5.21 03/12/97 6,137,191
20,000,000 5.36 03/25/97 19,752,844
19,000,000 5.32-5.36 03/26/97 18,762,747
9,000,000 5.32 03/27/97 8,886,950
11,000,000 5.32 03/31/97 10,855,325
17,000,000 5.30 04/01/97 16,774,750
50,000,000 5.52/(b)/ 05/21/97 49,981,445
50,000,000 5.84 06/18/97 49,958,175
10,000,000 5.37/(b)/ 06/26/97 9,996,868
50,000,000 5.49/(b)/ 08/26/97 49,972,764
50,000,000 5.36/(b)/ 10/02/97 49,959,775
Federal Home Loan Bank
5,100,000 5.22 01/02/97 5,099,261
50,000,000 5.38/(b)/ 01/03/97 49,999,747
17,895,000 5.24 01/16/97 17,855,929
34,900,000 5.23 01/23/97 34,788,562
25,000,000 5.28 01/28/97 24,901,000
133,300,000 5.22-5.35 01/30/97 132,733,719
25,130,000 5.28 01/31/97 25,019,533
181,845,000 5.21-5.32 02/13/97 180,701,332
28,750,000 5.21-5.26 02/14/97 28,566,649
145,815,000 5.20% 02/20/97 144,761,891
34,300,000 5.31 02/21/97 34,041,978
125,320,000 5.20-5.21 02/27/97 124,287,275
27,680,000 5.21 03/06/97 27,423,622
101,750,000 5.23 03/13/97 100,700,477
35,000,000 5.35 03/27/97 34,557,882
50,000,000 5.51/(b)/ 03/27/97 49,989,790
80,000,000 5.35 03/31/97 78,941,889
100,000,000 5.22/(b)/ 04/01/97 99,981,167
25,000,000 5.84 06/27/97 24,976,809
50,000,000 5.51/(b)/ 08/28/97 49,977,691
65,000,000 5.50/(b)/ 09/26/97 64,962,440
50,000,000 5.50/(b)/ 12/26/97 49,959,182
Student Loan Marketing Association
75,000,000 5.41 10/02/97 74,972,733
74,000,000 5.46 11/10/97 73,963,185
Tennessee Valley Authority
40,000,000 5.21 01/24/97 39,866,856
47,975,000 5.21 02/05/97 47,731,993
47,300,000 5.21 02/06/97 47,053,567
87,385,000 5.20-5.22 02/19/97 86,765,491
75,000,000 5.17 02/20/97 74,461,458
75,000,000 5.17 02/21/97 74,450,688
60,840,000 5.26-5.31 02/25/97 60,347,412
20,000,000 5.23 03/21/97 19,770,461
106,885,000 5.28 03/26/97 105,568,177
75,000,000 5.25 04/09/97 73,928,125
- ------------------------------------------------------------
Total Investments $3,300,609,972/(c)/
============================================================
/(a)/Variable rate security-base index is one of the following:
U.S. Treasury Bill
One or three month LIBOR
Federal Funds
Prime lending rate
/(b)/Variable rate master note-base index is LIBOR.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- -------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio
December 31, 1996
- --------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
==============================================================
Alabama--6.4%
Columbia IDB PCRB Series 1996 A for Alabama Power Co.
(VMIG1)
$21,000,000 5.00% 01/01/97 $21,000,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 B
(A-1/VMIG1)/(c)/
23,500,000 5.00 01/01/97 23,500,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 C
(A-1/VMIG1)
4,600,000 4.65 01/01/97 4,600,000
Columbia IDB PCRB VRDN for Alabama Power Co. Series
1995 E
(A-1/VMIG1)
4,900,000 5.10 01/01/97 4,900,000
Homewood RB for Samford University (Bank of Nova Scotia
LOC) (A-1+/VMIG1)
16,000,000 5.00 01/01/97 16,000,000
Jefferson County Sewer Revenue Warrants Series 1995 A
(Bayerische Landesbank Girozentrale LOC)(A-1+/P-1)
19,300,000 4.25 01/07/97 19,300,000
Mobile County IDA PCRB for M&T Chemicals (Bankers Trust
LOC) (A1)
3,000,000 4.13 01/01/97 3,000,000
Mobile IDA PCRB for Alabama Power Co. Series
1993A(A-1/VMIG1)
8,600,000 4.15 01/01/97 8,600,000
Mobile IDA PCRB for Alabama Power Co. Series
1994(A-1/VMIG1)
2,100,000 5.00 01/01/97 2,100,000
- -----------------------------------------------------------
$103,000,000
- -----------------------------------------------------------
Alaska--0.2%
Valdez Marine Terminal RB for Arco, Inc. Series 1994
C(A-1/P-1)
$ 2,600,000 3.60% 04/10/97 $ 2,600,000
- -----------------------------------------------------------
Arkansas--1.2%
Crossett PCRB for Georgia Pacific Corp. Series 1991
VRDN
(Suntrust Bank LOC)(A-1+/AA3)
$ 9,500,000 4.15% 01/07/97 $ 9,500,000
Union County PCRB Series 1988 for Great :Lakes Chemical
(A-1)
9,000,000 4.21/(b)/ 01/07/97 9,000,000
- -----------------------------------------------------------
$18,500,000
- -----------------------------------------------------------
California--5.8%
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
$ 6,000,000 3.47% 01/31/97 $ 6,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
12,000,000 4.00 01/07/97 12,000,000
California Statewide Communities Development Authority
Refunding RB Series 1995(A-1+)/(c)/
$ 9,300,000 3.90% 01/07/97 $ 9,300,000
California Statewide Communities Development Authority
Refunding RB Series 1995A-2(A-1+)
2,500,000 3.90 01/07/97 2,500,000
Los Angeles County MF Hsg. RB(A-1+)
3,500,000 2.80 01/07/97 3,500,000
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty
Trust Co./Westdeutsche Landesbank Girozentrale/Bank
of America/Union Bank of Switzerland
LOC)(SP-1/VMIG1)
12,450,000 4.50 06/30/97 12,492,536
Newport Beach VRDN RB Series 1996 A(A-1+)
600,000 5.15 01/01/97 600,000
State of California RANS Series 1996-97(SP-1+/VMIG1)
45,800,000 4.05 01/07/97 45,800,000
- -----------------------------------------------------------
$92,192,536
- -----------------------------------------------------------
Colorado--0.6%
State of Colorado General Fund TRANS Series 1996
A(SP-1+)
$10,000,000 4.50% 06/27/97 $10,033,630
- -----------------------------------------------------------
Connecticut--1.4%
State of Connecticut Development Authority
PCRB(Deutsche Bank LOC)(A-1+/VMIG1)
$17,400,000 4.15%/(b)/ 01/07/97 $17,400,000
State of Connecticut State 2nd Lien VRDN (Commerzbank
Bank LOC)(A-1+/VMIG1)
4,800,000 4.00 01/07/97 4,800,000
- -----------------------------------------------------------
$22,200,000
- -----------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES for Georgetown
University Series 1988 B, C and E (Bayerishe
Landesbank Girozentrale LOC)
(A-1+/VMIG1)
$10,900,000 4.10% 01/07/97 $10,900,000
HFA MF Hsg. for Mclean Gardens South Apartments VRDN
(Sumitomo Bank LOC)(VMIG1)
7,000,000 4.30 01/07/97 7,000,000
- -----------------------------------------------------------
$17,900,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Florida--2.8%
Dade County Water & Sewer VRDN Series 1994(A-1+/VMIG1)
$7,475,000 4.00%/(b)/ 01/07/97 $ 7,475,000
Florida Local Government Pooled CP Notes (First Union
National Bank of Florida LOC)(A-1+/P-1)
29,162,000 3.70 01/24/97 29,162,000
7,225,800 3.60 02/18/97 7,225,800
1,800,000 3.50 03/14/97 1,800,000
- -----------------------------------------------------------
$45,662,800
- -----------------------------------------------------------
Georgia--12.0%
Albany Dougherty PCRB for Philip Morris Co. (A-1/P-1)
$17,000,000 4.15% 01/07/97 $17,000,000
Albany Dougherty PCRB Series 1991 for Georgia Power
Co.(A-1+)
2,120,000 4.15 01/07/97 2,120,000
Burke County Development Authority RB(A-1+/VMIG1)
6,000,000 4.65 01/01/97 6,000,000
29,055,000 5.00 01/01/97 29,055,000
3,000,000 4.15 01/07/97 3,000,000
Burke County PCRB for Georgia Power Co.(A-1+/VMIG1)/(c)/
2,900,000 5.00 01/07/97 2,900,000
29,850,000 4.00/(b)/ 01/07/97 29,850,000
3,425,000 4.15 01/07/97 3,425,000
6,000,000 4.15 01/07/97 6,000,000
Burke County PCRB for Georgia Power Co. Series
1994(VMIG1)
3,400,000 5.00 01/07/97 3,400,000
Cobb County Institute of Nuclear Operations Inc. VRDN
for Georgia Power Co. (Suntrust Bank LOC)(Aa3)
4,295,000 4.15 01/07/97 4,295,000
Cobb County Power Operations Inc. VRDN (Trust Company
Bank LOC)(AA-)
2,330,000 4.15 01/07/97 2,330,000
Columbus Hospital Authority RB for St. Francis
Hospital(VMIG1)
7,750,000 4.15/(b)/ 01/01/97 7,750,000
DeKalb County IDA VRDN for Siemens Energy and
Automation, Inc.(P-1)
3,750,000 4.05 01/07/97 3,750,000
Dekalb Private Hospital Authority VRDN for Egleston
Children's Hospital Series 1994 A (Suntrust Bank
LOC)(VMIG1)
1,800,000 4.05 01/07/97 1,800,000
Floyd County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
5,080,000 5.00 01/07/97 5,080,000
Fulco Hospital Authority Revenue Anticipation
Certificates Series 1992 (Suntrust Bank LOC)(A-1+)
4,815,000 4.15% 01/07/97 4,815,000
Georgia Municipal Gas Authority RB(A-1/VMIG1)
22,200,000 4.00/(b)/ 01/07/97 22,200,000
Heard County PCRB for Georgia Power Co. Series
1996(A-1/VMIG1)
1,800,000 5.00 01/01/97 1,800,000
Henry County IDA PCRB for Georgia Pacific Corp.
(Suntrust Bank LOC)(Aa3)
4,000,000 4.15 01/07/97 4,000,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1985 B and C (Credit
Suisse/Morgan Guaranty/Bayerische Landesbank
Girozentrale LOC)(A-1+/P-1)
12,650,000 3.55 03/06/97 12,650,000
8,145,000 3.55 03/11/97 8,145,000
Municipal Electric Authority of Georgia Subordinate
General Resolution Series 1994 C (Credit
Suisse/Morgan Guaranty/
Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
7,000,000 3.50 03/13/97 7,000,000
Savannah Economic Development Authority PCRB VRDN for
Savannah Electric & Power Co. (A-1/VMIG1)
4,085,000 4.15 01/07/97 4,085,000
- -----------------------------------------------------------
$192,450,000
- -----------------------------------------------------------
Hawaii--0.1%
Hawaii Housing Finance and Development Authority VRDN
(FHLB LOC)(A-1+)
$ 2,200,000 2.80% 01/07/97 $ 2,200,000
- -----------------------------------------------------------
Idaho--0.6%
Idaho Health Facilities for Holy Cross Health
Systems(A-1/VMIG1)
$10,000,000 4.10% 01/07/97 $10,000,000
- -----------------------------------------------------------
Illinois--3.2%
Belleville IDA for Weyerhaeuser Company Series
1993(A-1)
$ 1,800,000 4.21% 01/07/97 $ 1,800,000
Illinois Health Facilities Authority VRDN for Central
Dupage Hospital (Rabobank Nederland LOC)(VMIG1)
5,000,000 5.25 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for
Resurrection Healthcare(VMIG1)
15,000,000 5.00 01/01/97 15,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- ------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
Illinois (continued)
Illinois Health Facilities Authority VRDN Series 1985 D Revolving
Fund Pooled Finance Program (First National Bank of Chicago
LOC)(A-1/VMIG1)
$16,600,000 4.15% 01/07/97 $ 16,600,000
Illinois Health Facility Authority VRDN for Elmhurst Memorial
Hospital(VMIG1)
100,000 5.30 01/01/97 100,000
Sauget PCRB VRDN Series 1992(P-1)
3,300,000 4.20 01/07/97 3,300,000
Sauget PCRB VRDN Series 1993(P-1)
9,335,000 4.20 01/07/97 9,335,000
- -----------------------------------------------------------
$ 51,135,000
- -----------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN Series 1985 C and D (Bank of
America LOC)(VMIG1)
$ 1,180,000 4.15% 01/07/97 $ 1,180,000
Fort Wayne Parkview Memorial Hospital VRDN Series 1985
B, C & D (Fuji Bank LOC)(VMIG1)/(c)/
16,855,000 4.15 01/07/97 16,855,000
Gary CP Notes for U.S. Steel Corp. (Bank of New York LOC)
(A-1+/P-1)
20,000,000 3.55 03/11/97 20,000,000
Indiana Hospital Equipment Financing Authority VRDN
Series 1985 A (MBIA)(A-1/VMIG1)
29,490,000 4.20 01/07/97 29,490,000
Jasper County PCRB for Nipsco Series 1994 A(A-1+/VMIG1)
5,200,000 5.10 01/01/97 5,200,000
Schererville Economic Development VRDN Series 1983 for Avery
International Corp. Project (Bankers Trust LOC)(Aa2)
4,000,000 4.13 01/07/97 4,000,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
5,000,000 4.15 01/07/97 5,000,000
- -----------------------------------------------------------
$ 81,725,000
- -----------------------------------------------------------
Iowa--1.4%
Muscatine County VRDN for Monsanto Corp.(P-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Salix PCRB VRDN for Midwest Power Systems Inc.(A-1/VMIG1)/(c)/
21,795,000 4.15 01/07/97 21,795,000
- -----------------------------------------------------------
$ 22,795,000
- -----------------------------------------------------------
Kentucky--1.7%
Calvert VRDN for Air Products and Chemicals Inc. Project(A-1)
$ 1,000,000 4.20% 01/07/97 $ 1,000,000
Mason County Variable/Fixed Rate PCRB Pooled for East Kentucky
Power (CFC)(A-1+/Aa3)
13,450,000 4.15 01/07/97 13,450,000
Trimble County PCRB for Louisville Gas & Electric Series 1996 A(A-
1+/VMIG1)
12,500,000 3.50 03/14/97 12,500,000
- -----------------------------------------------------------
$ 26,950,000
- -----------------------------------------------------------
Louisiana--2.5%
Ascension Parish PCRB for BASF Wyandotte Corp. Series
1985 (Bank of Tokyo LOC)(P-1)
$ 2,600,000 5.10% 01/01/97 $ 2,600,000
Ascension Parish PCRB for Vulcan Materials Co. Series 1996(A-
1+/VMIG1)
8,200,000 4.20 01/07/97 8,200,000
Louisiana Public Facilities Authority School Health Care System
UPDATE Series 1993(A-1+/VMIG1)
7,700,000 3.60 01/08/97 7,700,000
Parish of Desoto PCRB Series 1991 A (Swiss Bank LOC)(A-1+/VMIG1)
4,600,000 4.05 01/07/97 4,600,000
Parish of Iberville VRDN for Air Products and Chemicals, Inc.
Project(A-1)
6,200,000 4.20 01/07/97 6,200,000
Plaquemines Port RB for Teco Energy, Inc. Series 1985 B(A-1+/P-1)
2,000,000 3.60 02/13/97 2,000,000
South Louisiana Port Commission RB for Occidental Petroleum Corp.
Series 1996 (Wachovia Bank LOC)(P-1)
4,400,000 4.15 01/07/97 4,400,000
West Baton Rouge Parish VRDN for Dow Chemical Co. Series 1991
(P-1)
4,000,000 3.55 02/10/97 4,000,000
- -----------------------------------------------------------
$ 39,700,000
- -----------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Maryland--0.9%
Baltimore County Consolidated Public Improvement BANS Series
1995(A-1+/P-1)
$10,000,000 3.55% 02/06/97 $ 10,000,000
Frederick GO VRDN (Fuji Bank LOC)(A-1/VMIG1)
4,800,000 4.25 01/07/97 4,800,000
- --------------------------------------------------------------------
$ 14,800,000
- --------------------------------------------------------------------
Massachusetts--1.6%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$11,000,000 3.75% 02/28/97 $ 11,008,115
Massachusetts Health & Education Authority RB for Harvard
University Series I(A-1+/VMIG1)/(c)/
13,866,000 3.90 01/07/97 13,866,000
- --------------------------------------------------------------------
$ 24,874,115
- --------------------------------------------------------------------
Michigan--0.7%
Michigan Job Development Authority for Mazda Motor Manufacturing
VRDN (Sumitomo Bank LOC)(VMIG1)
$11,100,000 4.25% 01/07/97 $ 11,100,000
- --------------------------------------------------------------------
Minnesota--1.5%
Becker PCRB for Northern States Power Co. Series 1992 A(A-1+)
$ 8,000,000 3.65% 01/16/97 $ 8,000,000
6,000,000 3.55 03/12/97 6,000,000
Becker PCRB for Northern States Power Co. Series 1993 A(A-1/VMIG1)
4,000,000 3.55 03/12/97 4,000,000
White Bear Lake IDA for Weyerhauser Co. Series 1993(A-1)
6,800,000 4.21 01/07/97 6,800,000
- --------------------------------------------------------------------
$ 24,800,000
- --------------------------------------------------------------------
Mississippi--0.6%
Canton IDR for Levi Strauss Co. (Bank of America LOC)(P-1)
$10,000,000 4.15%/(b)/ 01/07/97 $ 10,000,000
- --------------------------------------------------------------------
Missouri--1.8%
Belton RB (Texas Commerce Bank LOC)(P-1)
$ 4,025,000 4.25% 01/07/97 $ 4,025,000
Kansas City Cloversett IDA MF Hsg. RB Series 1988 VRDN (Boatmen's
Bank of Kansas City LOC)(A-1+)
8,720,000 4.30 01/07/97 8,720,000
Missouri Health & Education Facility Authority VRDN (MBIA)(AAA)
10,500,000 4.10 01/07/97 10,500,000
State Environmental Improvement and Energy Resources
Authority RB for Monsanto Corporation (P-1)
$ 5,520,000 4.20% 01/07/97 $ 5,520,000
- --------------------------------------------------------------------
$ 28,765,000
- --------------------------------------------------------------------
Montana--0.3%
Forsyth PCRB for Pacificorp. Series 1988 (Industrial Bank of Japan
LOC)(A-1/P-1)
$ 3,400,000 4.70% 01/01/97 $ 3,400,000
Montana State Board of Investments VRDN Payroll Tax Bonds(VMIG1)
1,000,000 4.00 01/07/97 1,000,000
- --------------------------------------------------------------------
$ 4,400,000
- --------------------------------------------------------------------
Nevada--0.2%
Clark County VRDN for Nevada Airport System (MBIA)
(A-1+/VMIG1)
$ 3,200,000 4.00% 01/07/97 $ 3,200,000
- --------------------------------------------------------------------
New Jersey--3.3%
New Jersey TRANS Series 1997 A(A-1+/P-1)
$48,000,000 3.50% 03/12/97 $ 48,000,000
New Jersey Turnpike Authority RB Series 1991 D (FGIC)(P-1)
5,600,000 3.75 01/07/97 5,600,000
- --------------------------------------------------------------------
$ 53,600,000
- --------------------------------------------------------------------
New Mexico--0.2%
Farmington PCRB for Arizona Public Service Series 1994 A (Union
Bank of Switzerland LOC)(A-1+/P-1)
$ 2,600,000 5.00% 01/01/97 $ 2,600,000
- --------------------------------------------------------------------
New York--12.1%
New York City GO VRDN Series 1993 B (FGIC)(A-1+/VMIG1)
$ 5,500,000 4.50% 01/01/97 $ 5,500,000
New York City GO (MBIA)(VMIG1)
19,800,000 4.15 01/07/97 19,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
60,000,000 4.50 04/15/97 60,137,770
New York City GO Series 1992 D (FGIC)
20,000,000 3.95 01/07/97 20,000,000
New York City GO Series 1994 (Union Bank of Switzerland
LOC)(A-1+/VMIG1)
2,200,000 4.50 01/01/97 2,200,000
New York City GO VRDN (Dai-Ichi Kangyo Bank LOC)(A-1/VMIG1)
2,600,000 4.50 01/01/97 2,600,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
New York (continued)
New York City GO VRDN (Norinchukin Bank LOC) (A-1+/VMIG1)
$ 7,000,000 4.50% 01/01/97 $ 7,000,000
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
8,900,000 3.50 03/12/97 8,900,000
New York City Municipal Water Finance Authority Series 3 (Toronto
Dominion Bank/Bank of Nova Scotia
LOC)(A-1+/P-1)
3,000,000 3.50 03/11/97 3,000,000
New York State Energy Research & Development Authority PCRB for
New York State Electric & Gas Series 1994 D (Union Bank of
Switzerland LOC)(A-1+/VMIG1)
8,700,000 4.40 01/01/97 8,700,000
New York State Housing Finance Agency for Normandie Court
Housing RB Series 1987 A (Fleet Bank LOC)(VMIG1)
900,000 4.00 01/07/97 900,000
New York State Local Government Assistance Series 1995 B VRDN
(Bank of Nova Scotia LOC)(A-1+/VMIG1)/(c)/
19,600,000 4.00 01/07/97 19,600,000
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
1,150,000 3.85 01/07/97 1,150,000
New York State Local Government VRDN Series 1995 F (Toronto
Dominion Bank LOC)(A-1+/VMIG1)/(c)/
15,000,000 4.00 01/07/97 15,000,000
New York State Triborough Bridge & Tunnel Authority VRDN
(FGIC)(A-1+/VMIG1)
19,300,000 4.00 01/07/97 19,300,000
- --------------------------------------------------------------------
$193,787,770
- --------------------------------------------------------------------
North Carolina--6.0%
North Carolina Eastern Municipal Power Agency RB Series 1988 B
(Morgan Guaranty/Union Bank of Switzerland LOC)(A-1+)
$ 2,700,000 3.70% 01/16/97 $ 2,700,000
10,000,000 3.70 01/27/97 10,000,000
Person County PCRB for Carolina Power & Light Series 1992 A
(A-1/P-1)
7,000,000 4.25 01/07/97 7,000,000
Rockingham County IDA PCRB for Philip Morris Co.(A-1/P-1)
3,960,000 4.15 01/07/97 3,960,000
North Carolina (continued)
Wake County PCRB for Carolina Power & Light Series 1990 A & B (Fuji
Bank LOC)(A-2/P-1)
$ 7,000,000 3.75% 02/06/97 $ 7,000,000
11,000,000 3.55 02/07/97 11,000,000
12,100,000 3.55 02/10/97 12,100,000
12,900,000 3.75 02/14/97 12,900,000
29,000,000 3.75 02/18/97 29,000,000
- -------------------------------------------------------------
$95,660,000
- -------------------------------------------------------------
Ohio--2.4%
Cleveland-Cuyahoga County Port Authority VRDN for Rock & Roll
Hall of Fame (Credit Local de France LOC)(A-1+)
$ 9,000,000 4.05% 01/07/97 $ 9,000,000
Columbus Electric System Series 1994 RB (Union Bank of Switzerland
LOC)(VMIG1)
10,620,000 3.35 01/31/97 10,620,000
Franklin County Hospital RB for Holy Cross Health System Series
1995(A-1/VMIG1)/(c)/
18,900,000 4.10 01/07/97 18,900,000
- -------------------------------------------------------------
$38,520,000
- -------------------------------------------------------------
Oregon--1.7%
Lane County PCRB VRDN for Weyerhaeuser Company Series 1994
(A-1)
$ 6,500,000 4.21% 01/07/97 $ 6,500,000
Portland VRDN for Columbia Grain Inc. Project (Fuji Bank/Bank of
Tokyo LOC)(VMIG1)
17,650,000 4.25 01/07/97 17,650,000
State of Oregon Veteran's Welfare Series 73 H VRDN (Morgan
Guaranty LOC)(A-1+/VMIG1)
3,400,000 4.00 01/07/97 3,400,000
- -------------------------------------------------------------
$27,550,000
- -------------------------------------------------------------
Pennsylvania--2.7%
Allegheny County PCRB for U.S. Steel Series 1985 (Commerzbank
LOC)(A-1+/P-1)
$28,400,000 3.50% 03/13/97 $28,400,000
Allegheny County PCRB for U.S. Steel Series 1986 (Commerzbank
LOC)(A-1+/P-1)
700,000 3.50 02/06/97 700,000
Philadelphia TRANS Series 1996-97 A(SP-1/VMIG1)
14,000,000 4.50 06/30/97 14,036,476
- --------------------------------------------------------------
$43,136,476
- --------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Puerto Rico--2.0%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$32,000,000 4.00% 07/30/97 $ 32,103,040
- -------------------------------------------------------------------
South Carolina--0.7%
York County Floating/Fixed Rate PCRB Pooled Series 1984-North
Carolina Electric Membership Corp. VRDN (CFC)(A-1+/VMIG1)
$11,275,000 4.15% 01/07/97 $ 11,275,000
- -------------------------------------------------------------------
Texas--11.5%
Brazos Harbor IDA VRDN for Monsanto Co.(P-1)
$ 3,500,000 4.20% 01/07/97 $ 3,500,000
Brazos River Authority PCRB Series 1994 for Monsanto Co.(P-1)
5,100,000 4.20 01/07/97 5,100,000
Brazos River Authority VRDN for Monsanto Co.(P-1)
5,300,000 4.20 01/07/97 5,300,000
Brazos River Harbor Authority VRDN for Dow Chemical Corp. Series
1991(A-1/P-1)
13,500,000 3.60 01/24/97 13,500,000
Harris County Health Facilities Development Corp. UPDATE Series
1993(A-1+/VMIG1)
5,200,000 3.55 01/07/97 5,200,000
5,200,000 3.50 01/29/97 5,200,000
Harris County Hospital RB for Childrens Hospital Series 1989 B-2
(VMIG1)
7,900,000 4.10 01/07/97 7,900,000
Harris County Toll Road VRDN Series 1994 C(A-1+/VMIG1)
23,700,000 4.05 01/07/97 23,700,000
Nueces River IDA PCRB UPDATE for San Miguel Electric Series 1984
(CFC)(A-1+/VMIG1)
25,000,000 3.50 02/26/97 25,000,000
25,700,000 3.50 03/10/97 25,700,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
18,800,000 3.50 03/12/97 18,800,000
State of Texas TRANS Series 1996(SP-1+/VMIG1)/(c)/
25,000,000 4.75/(b)/ 08/29/97 25,193,274
20,000,000 4.75 08/29/97 20,154,620
- -------------------------------------------------------------------
$ 184,247,894
- -------------------------------------------------------------------
Utah--0.2%
Salt Lake County PCRB for Service Station/British Petroleum Series
1994 B(P-1)
$ 2,815,000 5.00% 01/01/97 $ 2,815,000
- -------------------------------------------------------------------
Virginia--6.7%
Chesapeake PCRB for Virginia Electric & Power Series
1985(A-1/P-1)
$22,000,000 3.60% 02/06/97 $22,000,000
Chesterfield County PCRB for Philip Morris Series 1987 A(A-1/P-1)
5,000,000 3.55 02/06/97 5,000,000
Chesterfield County PCRB for Philip Morris Series 1992(A-1/P-1)
14,700,000 4.15 01/07/97 14,700,000
Chesterfield County PCRB for Virginia Electric & Power Series 1985
(A-1/P-1)
8,000,000 3.60 02/07/97 8,000,000
5,200,000 3.60 02/12/97 5,200,000
Chesterfield County PCRB for Virginia Electric & Power
Series 1987 C(A-1/P-1)
1,000,000 3.60 02/12/97 1,000,000
Louisa PCRB For Virginia Electric & Power Series 1984(A-1/P-1)
4,000,000 3.60 02/07/97 4,000,000
4,000,000 3.60 02/13/97 4,000,000
3,000,000 3.60 02/14/97 3,000,000
Louisa PCRB for Virginia Electric & Power Series 1987(A-1/P-1)
1,300,000 3.55 02/06/97 1,300,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
20,400,000 4.10 01/07/97 20,400,000
Spotsylvania IDA for Carlisle Corporation (Suntrust Bank LOC)(AA3)
6,500,000 4.15/(b)/ 01/07/97 6,500,000
York County PCRB for Virginia Electric & Power Series 1985(A-1/P-1)
9,400,000 3.70 01/14/97 9,400,000
2,700,000 3.65 03/10/97 2,700,000
- -------------------------------------------------------------------
$ 107,200,000
- -------------------------------------------------------------------
Washington--4.6%
King County Sewer Revenue BANS Series A(A-1/P-1)
$10,000,000 3.55% 03/10/97 $10,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1992(A-1+)
1,000,000 4.21 01/07/97 1,000,000
Port of Grays Harbor IDA VRDN for Weyerhaeuser Project Series
1993(A-1+)
5,850,000 4.21 01/07/97 5,850,000
Port of Kalama Floating/Fixed Rate for Conagra, Inc. Series 1983
(Morgan Guaranty Trust LOC)(AAA)
2,230,000 4.00 01/07/97 2,230,000
Union Gap City IDA VRDN for Weyerhaeuser Project Series 1992(A-1)
1,600,000 4.21 01/07/97 1,600,000
- ------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Statement of Investments
- -------------------------------------------------------------------------------
ILA Tax-Exempt Diversified Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
Washington (continued)
Washington Health Care Facilities Authority VRDN Series 1996
(Morgan Guaranty Trust LOC)(VMIG1)
$4,300,000 5.25% 01/01/97 $ 4,300,000
Washington Public Power Supply Project Electric RB Series 1993-1A
(Bank of America LOC)(A-1+/VMIG1)
10,860,000 4.10 01/07/97 10,860,000
Washington Public Power Supply Project Electric RB Series 1993-2A
(Bank of America LOC)(A-1/VMIG1)
11,100,000 4.10 01/07/97 11,100,000
Washington Public Power Supply System RB Series 1993-3A
(Bank of America LOC)(A-1+/VMIG1)
15,000,000 4.10/(b)/ 01/07/97 15,000,000
3,115,000 3.95 01/07/97 3,115,000
8,200,000 4.10 01/07/97 8,200,000
- -----------------------------------------------------------
$73,255,000
- -----------------------------------------------------------
Wyoming--1.4%
Pacificorp PCRB VRDN for Sweetwater County Series 1990 A
(Credit Suisse LOC)(VMIG1)
$16,200,000 4.15% 01/07/97 $16,200,000
Sweetwater County PCRB for Idaho Power Co. Series 1996 C
(A-1+/VMIG1)
6,100,000 5.10 01/01/97 6,100,000
- -----------------------------------------------------------
$22,300,000
- -----------------------------------------------------------
Total Investments $1,749,033,261/(a)/
==========================================================
/(a)/The amount stated also represents aggregate cost for federal
income tax purposes.
/(b)/When-issued securities.
/(c)/Portions of these securities are being segregated for when-issued
securities.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those type of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- -----------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio
December 31, 1996
- ------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
============================================================
California--96.4%
California Health Facilities Authority VRDN for Kaiser Permanente
Series 1993 A, B & C RB(A-1+/VMIG1)
$ 2,000,000 4.00% 01/07/97 $ 2,000,000
California Health Facility Finance Authority RB Series
1990 A VRDN (Rabobank Nederland LOC)(A-1+/VMIG1)
8,100,000 4.00 01/07/97 8,100,000
California PCRB for Pacific Gas & Electric (Banque Nationale de Paris
LOC)(A-1+)
4,100,000 4.80 01/01/97 4,100,000
California Pollution Control Financing Authority for Southern
California Edison Adjustable TRB Series 1986 D(A-1/VMIG1)
1,800,000 4.70 01/01/97 1,800,000
California RANS VRDN Series 1996-97 B(SP-1+/VMIG1)
10,000,000 3.47 01/31/97 10,000,000
California RANS VRDN Series 1996-97 C1(SP-1+/VMIG1)
25,500,000 4.01 01/07/97 25,500,000
California School Cash Reserves Program Authority Series 1996 A
(MBIA)(SP-1/VMIG1)
9,000,000 4.75 07/02/97 9,040,248
California School Cash Reserves Program Authority Series 1996 B
(MBIA)(VMIG1)
10,000,000 4.50 12/19/97 10,083,758
California Statewide Communities Development Authority
for Kaiser Foundation Hospital 1995 COPS(A-1+/VMIG1)
16,500,000 4.00 01/07/97 16,500,000
California Statewide Communities Development Authority RB Series
1995 A (A-1+)
13,900,000 3.90 01/07/97 13,900,000
California Statewide Communities Development Authority Series
1995A-1(A-1+)
14,200,000 3.90 01/07/97 14,200,000
California Statewide Communities Development Authority, Refunding
RB Series 1995A-2(A-1+)
5,500,000 3.90 01/07/97 5,500,000
Chula Vista RB Series 1996 A for San Diego Gas & Electric(A-
1/VMIG1)
11,200,000 5.10 01/01/97 11,200,000
City of Anaheim Electric RANS Tax Exempt CP
Notes(A-1+/P-1)
8,950,000 3.45 01/29/97 8,950,000
City of Fresno MF Hsg. Revenue Refunding Bonds Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
3,315,000 4.15 01/07/97 3,315,000
City of Irwindale IDRB Series 1984 for Toys-R-Us VRDN (Bankers
Trust LOC)(AA2)
2,000,000 4.13% 01/07/97 2,000,000
City of Los Angeles VRDN MF Hsg. Museum Terrace-84H (Bank of
America LOC)(VMIG1)
3,500,000 4.00 01/07/97 3,500,000
City of Newport Beach Floating/Fixed Rate Health Facilities Memorial
Hospital Facility VRDN(A-1/VMIG1)
10,750,000 5.15 01/01/97 10,750,000
City of Newport Beach VRDN RB Series 1996 A(A-1+)
3,800,000 5.15 01/01/97 3,800,000
City of Newport Beach VRDN RB Series 1996 B(A-1+)
23,000,000 5.15 01/01/97 23,000,000
City of San Diego VRDN MF Hsg. RB Series 1985 (Bank of
America LOC)(VMIG1)
15,700,000 4.05 01/07/97 15,700,000
City of San Diego MF Hsg. for Lacima Apartments VRDN (Citibank
LOC)(VMIG1)
13,125,000 4.05 01/07/97 13,125,000
City of San Diego MF Hsg. for Nobel Court Apartments VRDN
(Citibank LOC)(VMIG1)
11,555,000 4.05 01/07/97 11,555,000
Contra Costa MF Hsg. for Lakeshore Apartments VRDN(A-1+)
4,600,000 4.05 01/07/97 4,600,000
East Bay Municipal Utility District California Water & Waste
(A-1+/P-1)
4,300,000 3.45 02/27/97 4,300,000
Huntington Beach City Monthly MF Hsg. VRDN Series 1985 A (Bank
of America LOC)(VMIG1)
7,500,000 4.00 01/31/97 7,500,000
Kings County Housing Authority MF Hsg. Refunding RB Series 1996 A
(First Interstate Bank of California LOC)(VMIG1)
2,500,000 4.15 01/07/97 2,500,000
Los Angeles County Metro Transportation Authority VRDN
(MBIA)(SP-1+/VMIG1)
4,595,000 4.00 01/07/97 4,595,000
Los Angeles County Metro Transportation Authority RANS Series 1996
A(VMIG1)
10,000,000 4.00 02/27/97 10,013,586
Los Angeles County Metro Transportation CP Notes (National
Westminster/Union Bank of California/ABN Amro/Canadian
Imperial Bank of Commerce/Banque Nationale de Paris LOC)
(A-1+/P-1)
10,000,000 3.65 01/10/97 10,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
ILA Tax-Exempt California Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
California (continued)
Los Angeles County TRANS (Credit Suisse/Morgan Guaranty Trust
Co./Westdeutsche Landesbank Girozentrale/Bank of
America/Union Bank of Switzerland LOC)(SP-1+/VMIG1)
$16,400,000 4.50% 06/30/97 $16,456,497
Los Angeles County, VRDN MF Hsg. for Valencia Village Series 1984 C
(Industrial Bank of Japan Ltd. LOC)(A-1+)
16,400,000 2.80 01/07/97 16,400,000
Los Angeles Housing Authority MF Hsg. VRDN for Canyon Country
Villas Series 1985 H (Industrial Bank of Japan Ltd. LOC)(VMIG1)
19,000,000 2.80 01/07/97 19,000,000
Northern California Power Agency Geothermal Project Number 3
Adjustable Rate RB Series 1996 A (AMBAC)(A-1+/VMIG1)
8,500,000 3.85 01/07/97 8,500,000
Orange County Apartment Development RB Issue 1984 C Seaside
Meadow (Fuji Bank Ltd.)(A-1/VMIG1)
24,000,000 3.95 01/07/97 24,000,000
Pomona Public Financing Authority VRDN (Sumitomo Bank LOC)
(SP-1+)
2,075,000 4.25 01/07/97 2,075,000
Sacramento County 1990 COP Admin-Center Courthouse Project
VRDN (Union Bank of Switzerland LOC)(A-1+/VMIG1)
500,000 3.75 01/07/97 500,000
San Bernardino County VRDN-Woodview Apartments Series
1985 (Bank of America LOC)(VMIG1)
6,500,000 4.05 01/07/97 6,500,000
San Diego County MF Hsg. for Country Hills VRDN (FNMA)
(A-1+)
10,300,000 4.05 01/07/97 10,300,000
San Diego IDB Series 1995 B for San Diego Gas & Electric(A-1/VMIG1)
1,000,000 3.50 01/23/97 1,000,000
San Leandro MF Hsg. VRDN Series 1985 B- Haas Avenue
Apartments (Bank of America LOC)(VMIG1)
3,900,000 4.00 01/07/97 3,900,000
Southern California Metro Water District Series A CP Notes(A-1+/P-1)
5,400,000 3.50 02/20/97 5,400,000
Southern California Metropolitan Water District Revenue
Refunding Bonds Series 1996 A (AMBAC)(A-1+/VMIG1)
4,500,000 4.00 01/07/97 4,500,000
Southern California Public Power Authority 1991 Subordinated
Revenue Refunding Bonds (AMBAC)(A-1+/VMIG1)
9,100,000 3.90 01/07/97 9,100,000
Southern California Public Power Authority Power
Project RB Series 1996 B (AMBAC)(A-1+/VMIG1)
7,500,000 3.90 01/07/97 7,500,000
Southern California Public Power Authority Power
Project RB Series 1996 C (AMBAC)(A-1+/VMIG1)
10,000,000 3.90 01/07/97 10,000,000
Triunfo Sanitation District VRDN Refunding RB Series 1994 (Banque
Nationale de Paris LOC)(A-1+)
3,700,000 4.20 01/07/97 3,700,000
Tulare-Porterville Schools Finance Authority COPS (Union Bank of
California LOC)(VMIG1)
4,935,000 4.30 01/07/97 4,935,000
- -----------------------------------------------------------
$424,894,089
- -----------------------------------------------------------
Puerto Rico--3.2%
Commonwealth of Puerto Rico RANS Series 1997 A(SP-1+/VMIG1)
$14,000,000 4.00% 07/30/97 $14,045,081
- -----------------------------------------------------------
Total Investments $438,939,170/(a)/
===========================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentage shown for each investment category reflects the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York--94.2%
City of Yonkers IDA RB for Consumers (Industrial Bank
of Japan LOC)(VMIG1)
$2,700,000 3.90% 01/07/97 $2,700,000
City of Yonkers IDA Series 1991 Civic Facility RB
(Industrial Bank of Japan LOC)(VMIG1)
2,900,000 3.90 01/07/97 2,900,000
Great Neck North Water Authority Water System RB Series
1993 A VRDN (FGIC)(A-1+/VMIG1)
3,800,000 4.00 01/07/97 3,800,000
IDA Civic Facility RB Cold Spring Harbor Labs Series
1989 VRDN (Morgan Guaranty Trust LOC)(A-1+)
2,200,000 4.90 01/01/97 2,200,000
Metropolitan Museum of Art Variable Rate Interest
Bonds(AA/AA)
1,500,000 4.00 01/07/97 1,500,000
Metropolitan Transportation Authority Commuter Facility
VRDN Series 1991 (National Westminster/Morgan
Guaranty/Industrial Bank of Japan/Sumitomo Bank/J.P.
Morgan/Bank of Tokyo LOC)(A-1+/VMIG1)
3,400,000 4.05 01/07/97 3,400,000
Nassau County TANS Series 1996 B(SP-1+)
3,500,000 4.25 08/29/97 3,515,754
New York City GO Bonds (Sumitomo Bank LOC)(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
New York City GO Fiscal 1995 Series B-6
(MBIA)(A-1+/VMIG1)
3,900,000 5.10 01/01/97 3,900,000
1,250,000 5.10 01/01/97 1,250,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
4,000,000 4.50 04/15/97 4,009,256
New York City IDA - Civic Facility RB 1989 National
Audubon Society, Inc. (Swiss Bank Corp. LOC)(A-1+)
4,000,000 4.80 01/01/97 4,000,000
New York City IDA for Columbia Grammar Prep School VRDN
(Chemical Bank LOC)(A-1+)
2,500,000 4.15 01/07/97 2,500,000
New York City Municipal Water Finance Authority CP
Series 1 (Canadian Imperial Bank of Commerce
LOC)(P-1)
6,900,000 3.55 01/16/97 6,900,000
New York City Municipal Water Finance Authority Series
3 (Toronto Dominion Bank/Bank of Nova Scotia
LOC)(P-1)
2,500,000 3.50 03/11/97 2,500,000
New York City Trust for Cultural Resources American
Museum of Natural History Adjustable Rate TRB VRDN
(MBIA)(VMIG1)
$3,200,000 3.80% 01/07/97 $3,200,000
New York State Dormitory Authority RB Series 1990 B for
Cornell University VRDN(VMIG1)
4,700,000 4.80 01/01/97 4,700,000
New York State Energy Research & Development Authority
For Long Island Lighting Co. VRDN (Toronto Dominion
Bank LOC) (A-1+/P-1)
3,000,000 4.05 01/07/97 3,000,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 B
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
7,800,000 5.00 01/01/97 7,800,000
New York State Energy Research & Development Authority
PCRB for New York State Electric & Gas Series 1994 D
(Union Bank of Switzerland LOC)(A-1+/VMIG1)
3,600,000 4.40 01/01/97 3,600,000
New York State Energy Research & Development Authority
PCRB for Rochester Gas & Electric Series 1984
(Credit Suisse LOC)(P-1)
2,100,000 3.40 01/31/97 2,100,000
New York State Energy Research & Development Authority
PCRB Series A & B - Central Hudson Gas & Electric
VRDN (Deutsche Bank LOC)(AA2)
1,300,000 3.90 01/07/97 1,300,000
New York State Energy Research & Development Authority
for Orange and Rockland Utilities Series 1995 A VRDN
(AMBAC)(A-1+/VMIG1)
5,000,000 3.80 01/07/97 5,000,000
New York State GO BANS Series R(A-1/P-1)
4,500,000 3.55 02/25/97 4,500,000
New York State GO BANS Series T(A-1/P-1)
3,500,000 3.55 02/24/97 3,500,000
New York State Housing Finance Agency for Normandie
Court Housing RB Series 1987 A (Fleet Bank
LOC)(VMIG1)
5,100,000 4.00 01/07/97 5,100,000
New York State Local Government Assistance Series 1995
B VRDN (Bank of Nova Scotia LOC)(A-1+/VMIG1)
1,700,000 4.00 01/07/97 1,700,000
New York State Local Government Series C VRDN
(Landesbank Hessen-Thueringen Girozentrale
LOC)(A-1+/VMIG1)
7,000,000 4.00 01/07/97 7,000,000
- ----------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
Statement of Investments
- -----------------------------------------------------------
ILA Tax-Exempt New York Portfolio (continued)
December 31, 1996
- -----------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===========================================================
New York (continued)
New York State Local Government Series G VRDN (National
Westminster Bank LOC)(A-1+/VMIG1)
$700,000 3.85% 01/07/97 $ 700,000
New York State Medical Care Facility Financing Agency
for Children's Hospital of Buffalo RB Series 1991 A
(Barclays Bank LOC)(VMIG1)
1,900,000 4.20 01/07/97 1,900,000
New York State Triborough Bridge & Tunnel Authority
VRDN (FGIC)(A-1+/VMIG1)
4,700,000 4.00 01/07/97 4,700,000
Oswego County IDA PCRB Series 1992 for Philip
Morris(A-1/P-1)
1,000,000 4.15 01/07/97 1,000,000
Syracuse University IDA VRDN (Morgan Guaranty
LOC)(AA+/A-1 /VMIG1)
1,200,000 4.80 01/01/97 1,200,000
- -----------------------------------------------------------
$107,875,010
- -----------------------------------------------------------
Puerto Rico--5.7%
Commonwealth of Puerto Rico RANS Series 1997
A(SP-1+/VMIG1)
$3,500,000 4.00% 07/30/97 $ 3,511,271
Puerto Rico Government Development Bank VRDN (Credit
Suisse LOC)(A-1/VMIG1)
1,000,000 3.75 01/07/97 1,000,000
Puerto Rico Medical and Environmental PCRB Series 1983
A for Key Pharmaceuticals Inc. (Morgan Guaranty LOC)
2,000,000 3.75 12/01/97 2,000,000
- -----------------------------------------------------------
$ 6,511,271
- -----------------------------------------------------------
Total Investments $114,386,281/(a)/
===========================================================
/(a)/ The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
BANS --Bond Anticipation Notes
CFC --Unconditionally Guaranteed by
Cooperative Finance Corp.
COPS --Certificates of Particication
CP --Commercial Paper
FGIC --Insured by Financial Guaranty
Insurance Co.
FNMA --Federal National Mortgage
Association
GO --General Obligation
HFA --Health Facility Authority
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDR --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TANS --Tax Anticipation Notes
TECP --Tax Exempt Commercial Paper
TRANS --Tax Revenue Anticipation Notes
TRB --Tender Revenue Bond
UPDATE --Unit Priced Daily Adjustable
Tax-Exempt Security
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- --------------------------------------
[This page intentionally left blank]
- -------------------------------------- -------------------------------------
23
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
==============================================
<S> <C> <C> <C>
Assets:
Investments in securities, at value based on amortized cost $1,266,243,902 $ 990,797,391 $ 827,240,879
Interest receivable 3,701,956 3,538,130 1,378,983
Cash 143,480 128,908 152,717
Other assets 18,680 33,706 48,509
- ------------------------------------------------------------------------------------------------------------------------
Total assets 1,270,108,018 994,498,135 828,821,088
- ------------------------------------------------------------------------------------------------------------------------
Liabilities:
Payable for investment securities purchased -- -- --
Dividends payable 5,999,306 4,784,617 3,427,645
Accrued expenses and other liabilities 530,616 513,611 459,492
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 6,529,922 5,298,228 3,887,137
- ------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 1,263,578,517 989,199,498 824,862,428
Accumulated undistributed net investment income -- -- --
Accumulated undistributed net realized gain (loss) on investment
transactions (421) 409 71,523
- ------------------------------------------------------------------------------------------------------------------------
Net assets $1,263,578,096 $ 989,199,907 824,933,951
========================================================================================================================
Net asset value, offering and redemption price per unit
(net assets/units outstanding) $ 1.00 $ 1.00 $ 1.00
========================================================================================================================
Units Outstanding:
ILA units 1,154,745,689 703,096,586 694,604,345
ILA Administration units 23,775,858 257,258,398 36,044,854
ILA Service units 84,710,642 28,844,514 94,213,229
ILA B units 346,328 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total units of beneficial interest outstanding, $.001 par value
(unlimited number of units authorized) 1,263,578,517 989,199,498 824,862,428
========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
================================================================================================
<S> <C> <C> <C> <C> <C>
$ 810,267,968 $1,221,566,240 $3,300,609,972 $1,749,033,261 $438,939,170 $114,386,281
532,015 14,004,604 4,477,173 7,404,080 2,433,885 404,538
99,319 148,266 365,400 1,862,438 599,385 41,299
775 10,026 125,725 8,601 8,650 --
- ------------------------------------------------------------------------------------------------
810,900,077 1,235,729,136 3,305,578,270 1,758,308,380 441,981,090 114,832,118
- ------------------------------------------------------------------------------------------------
-- -- -- 150,828,428 -- --
3,404,801 4,597,910 13,642,248 4,524,992 1,168,073 274,842
428,726 525,543 1,305,746 494,147 194,663 62,795
- ------------------------------------------------------------------------------------------------
3,833,527 5,123,453 14,947,994 155,847,567 1,362,736 337,637
- ------------------------------------------------------------------------------------------------
$ 807,035,766 1,230,590,333 3,290,699,109 1,602,342,561 440,637,879 114,499,366
-- -- -- 362,642 10,495 1,634
30,784 15,350 (68,833) (244,390) (30,020) (6,519)
- ------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $440,618,354 $114,494,481
================================================================================================
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
================================================================================================
574,608,995 708,990,271 2,303,703,731 1,514,523,522 440,495,857 70,178,026
108,916,431 137,701,171 794,578,398 59,097,259 142,022 44,321,340
123,510,340 383,898,891 192,416,980 28,918,372 -- --
-- -- -- -- -- --
- ------------------------------------------------------------------------------------------------
807,035,766 1,230,590,333 3,290,699,109 1,602,539,153 440,637,879 114,499,366
================================================================================================
- ------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
=========================================
<S> <C> <C> <C>
Investment income:
Interest income $81,770,923 $54,320,799 $39,035,321
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 5,185,990 3,447,586 2,509,206
Transfer agent fees 592,685 394,010 286,766
Custodian fees 289,863 203,454 157,058
Professional fees 43,453 28,965 22,465
Trustees' fees 19,256 10,622 9,356
Other 178,787 197,862 186,415
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 6,310,034 4,282,499 3,171,266
Less--Expenses reimbursable and fees waived by Goldman Sachs (234,432) (736,102) (231,536)
- ----------------------------------------------------------------------------------------------------------------------
Net expenses 6,075,602 3,546,397 2,939,730
Administration unit fees 65,534 316,155 63,048
Service unit fees 494,274 128,313 352,931
- ----------------------------------------------------------------------------------------------------------------------
Net expenses and unit fees 6,635,410 3,990,865 3,355,709
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 75,135,513 50,329,934 35,679,612
- ----------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $75,207,918 $50,402,799 $35,742,274
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================
<S> <C> <C> <C> <C> <C>
$48,666,691 $53,608,537 $146,327,912 $54,107,112 $13,695,668 $3,421,539
----------------------------------------------------------------------------------------
3,157,511 3,629,131 9,496,253 5,391,039 1,410,751 359,201
360,858 414,758 1,085,286 616,119 161,229 41,051
197,650 167,744 459,900 135,944 45,236 21,336
27,555 34,247 77,027 42,553 13,995 6,322
11,552 12,842 34,394 17,650 4,574 1,215
157,226 213,340 423,802 136,197 38,866 7,681
- -----------------------------------------------------------------------------------------
3,912,352 4,472,062 11,576,662 6,339,502 1,674,651 436,806
(212,886) (2,294,583) (4,522,286) (1,564,664) (22,092) (108,395)
----------------------------------------------------------------------------------------
3,699,466 2,177,479 7,054,376 4,774,838 1,652,559 328,411
145,201 145,441 906,321 73,660 262 39,843
579,790 1,266,586 562,023 130,158 -- --
- -----------------------------------------------------------------------------------------
4,424,457 3,589,506 8,522,720 4,978,656 1,652,821 368,254
- -----------------------------------------------------------------------------------------
44,242,234 50,019,031 137,805,192 49,128,456 12,042,847 3,053,285
- -----------------------------------------------------------------------------------------
195,578 416,602 (4,477) (12,968) 15 (4,539)
- -----------------------------------------------------------------------------------------
$44,437,812 $50,435,633 $137,800,715 $49,115,488 $12,042,862 $3,048,746
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
================================================
<S> <C> <C> <C>
From Operations:
Net investment income $ 75,135,513 $ 50,329,934 $ 35,679,612
Net realized gain(loss) on investment transactions 72,405 72,865 62,662
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 75,207,918 50,402,799 35,742,274
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (67,076,054) (38,261,044) (29,556,990)
ILA Administration units (2,206,827) (10,545,315) (2,048,010)
ILA Service units (5,850,540) (1,523,575) (4,074,612)
ILA B units (2,092) -- --
Net realized gain on investment transactions
ILA units (65,059) (54,983) (38,029)
ILA Administration units (2,127) (15,267) (2,635)
ILA Service units (5,640) (2,206) (5,242)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (75,208,339) (50,402,390) (35,725,518)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 9,633,671,566 8,281,604,075 5,115,245,365
Reinvestment of dividends and distributions 40,414,429 38,191,105 17,312,306
Cost of units repurchased (9,962,009,233) (8,092,253,028) (5,011,078,568)
- ----------------------------------------------------------------------------------------------------------------------
Increase(decrease) in net assets resulting from unit transactions (287,923,238) 227,542,152 121,479,103
- ----------------------------------------------------------------------------------------------------------------------
Total increase(decrease) (287,923,659) 227,542,561 121,495,859
Net Assets:
Beginning of year 1,551,501,755 761,657,346 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,263,578,096 $ 989,199,907 $ 824,933,951
======================================================================================================================
Accumulated undistributed net investment income -- -- --
======================================================================================================================
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 8,756,241,159 5,161,953,773 4,490,979,392
Reinvestment of dividends and distributions 36,833,028 30,348,683 13,978,786
Units repurchased (8,899,537,496) (5,063,361,34) (4,380,790,567)
- ----------------------------------------------------------------------------------------------------------------------
(106,463,309) 128,941,113 124,167,611
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 318,656,203 2,902,067,359 220,574,807
Reinvestment of dividends and distributions 1,520,549 7,510,848 283,223
Units repurchased (359,456,201) (2,816,742,074) (232,371,387)
- ----------------------------------------------------------------------------------------------------------------------
(39,279,449) 92,836,133 (11,513,357)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 558,266,701 217,582,943 403,691,166
Reinvestment of dividends and distributions 2,060,072 331,574 3,050,297
Units repurchased (702,853,581) (212,149,611) (397,916,614)
- ----------------------------------------------------------------------------------------------------------------------
(142,526,808) 5,764,906 8,824,849
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (288,269,566)* 227,542,152 121,479,103
======================================================================================================================
</TABLE>
* In addition, ILA B units had sales, reinvestments of dividends and
distributions and repurchases of 507,503, 780 and 161,955 units,
respectively, for a net increase of 346,328 units.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
=========================================================================================================
<S> <C> <C> <C> <C> <C>
$ 44,242,234 $ 50,019,031 $ 137,805,192 $ 49,128,456 $ 12,042,847 $ 3,053,285
195,578 416,602 (4,477) (12,968) 15 (4,539)
- ------------------------------------------------------------------------------------------------------
44,437,812 50,435,633 137,800,715 49,115,488 12,042,862 3,048,746
- ------------------------------------------------------------------------------------------------------
(32,818,890) (30,911,761) (101,011,206) (46,819,418) (12,036,826) (2,289,010)
(4,742,767) (4,651,770) (30,041,532) (1,375,597) (6,021) (764,275)
(6,680,577) (14,455,500) (6,752,454) (933,441) -- --
-- -- -- -- -- --
(124,367) (251,459) -- -- -- --
(17,973) (37,841) -- -- -- --
(25,316) (117,591) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(44,409,890) (50,425,922) (137,805,192) (49,128,456) (12,042,847) (3,053,285)
- ------------------------------------------------------------------------------------------------------
5,362,879,167 5,282,794,697 15,965,974,823 9,518,523,372 2,958,021,573 648,758,829
13,347,956 20,444,542 79,358,869 35,078,864 11,445,149 2,949,980
(5,492,732,128) (4,850,904,367) (15,106,127,095) (9,392,133,030) (2,875,637,134) (654,470,394)
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
- ------------------------------------------------------------------------------------------------------
(116,477,083) 452,344,583 939,202,120 161,456,238 93,829,603 (2,766,124)
923,543,633 778,261,100 2,351,428,156 1,441,004,575 346,788,751 117,260,605
- ------------------------------------------------------------------------------------------------------
$ 807,066,550 $1,230,605,683 $3,290,630,276 $1,602,460,813 $ 440,618,354 $114,494,481
=======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
=======================================================================================================
3,696,243,017 3,783,423,031 11,171,686,790 9,264,641,627 2,957,305,487 340,781,821
11,811,603 19,300,481 66,486,820 34,471,658 11,444,982 2,236,468
(3,844,547,762) (3,680,022,103) (10,666,427,699) (9,127,243,309) (2,875,001,835) (363,376,230)
- ------------------------------------------------------------------------------------------------------
(136,493,142) 122,701,409 571,745,911 171,869,976 93,748,634 (20,357,941)
- ------------------------------------------------------------------------------------------------------
659,581,577 470,006,128 3,606,492,816 142,908,870 716,086 307,977,008
855,243 1,082,829 11,506,068 298,114 167 713,512
(644,240,509) (402,096,387) (3,340,378,274) (132,882,806) (635,299) (291,094,164)
- ------------------------------------------------------------------------------------------------------
16,196,311 68,992,570 277,620,610 10,324,178 80,954 17,596,356
- ------------------------------------------------------------------------------------------------------
1,007,054,573 1,029,365,538 1,187,795,217 110,972,875 -- --
681,110 61,232 1,365,981 309,092 -- --
(1,003,943,857) (768,785,877) (1,099,321,122) (132,006,915) -- --
- ------------------------------------------------------------------------------------------------------
3,791,826 260,640,893 89,840,076 (20,724,948) -- --
- ------------------------------------------------------------------------------------------------------
(116,505,005) 452,334,872 939,206,597 161,469,206 93,829,588 (2,761,585)
=======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
29
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ILA ILA
Prime Money ILA
Obligations Market Government
Portfolio Portfolio Portfolio
----------------------------------------------
<S> <C> <C> <C>
From Operations:
Net investment income $ 107,583,870 $ 49,478,386 $ 51,830,087
Net realized gain (loss) on investment transactions 14,828 23,170 168,758
- ----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 107,598,698 49,501,556 51,998,845
- ----------------------------------------------------------------------------------------------------------------------
Distributions to Unitholders from:
Net investment income
ILA units (90,145,210) (39,853,826) (42,814,965)
ILA Administration units (5,198,674) (8,266,526) (3,434,653)
ILA Service units (12,239,986) (1,358,034) (5,580,469)
Net realized gain on investment transactions
ILA units (12,607) (18,166) (138,212)
ILA Administration units (741) (4,378) (12,197)
ILA Service units (1,480) (626) (17,502)
- ----------------------------------------------------------------------------------------------------------------------
Total distributions to unitholders (107,598,698) (49,501,556 ) (51,997,998)
- ----------------------------------------------------------------------------------------------------------------------
From unit transactions (at $1.00 per unit):
Proceeds from sales of units 12,338,624,975 6,865,371,082 6,147,457,376
Reinvestment of dividends and distributions 46,658,797 34,033,174 18,869,484
Cost of units repurchased (13,117,315,317) 6,864,945,994) (6,596,822,965)
- ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets resulting from unit
transactions (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
Total increase (decrease) (732,031,545) 34,458,262 (430,495,258)
Net Assets:
Beginning of year 2,283,533,300 727,199,084 1,133,933,350
- ----------------------------------------------------------------------------------------------------------------------
End of year $1,551,501,755 $ 761,657,346 $ 703,438,092
- ----------------------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Summary of unit transactions (at $1.00 per unit):
ILA Units:
Units sold 10,673,706,881 5,167,984,860 5,286,093,615
Reinvestment of dividends and distributions 43,663,215 30,173,260 14,307,877
Units repurchased (11,419,966,319) (5,183,472,607) (5,611,448,715)
- ----------------------------------------------------------------------------------------------------------------------
(702,596,223) 14,685,513 (311,047,223)
- ----------------------------------------------------------------------------------------------------------------------
ILA Administration Units:
Units sold 801,545,537 1,503,847,493 385,128,154
Reinvestment of dividends and distributions 1,574,573 3,545,805 410,476
Units repurchased (889,335,631) (1,488,837,741) (433,455,523)
- ----------------------------------------------------------------------------------------------------------------------
(86,215,521) 18,555,557 (47,916,893)
- ----------------------------------------------------------------------------------------------------------------------
ILA Service Units:
Units sold 863,372,557 193,538,729 476,235,607
Reinvestment of dividends and distributions 1,421,009 314,109 4,151,131
Units repurchased (808,013,367) (192,635,646) (551,918,727)
- ----------------------------------------------------------------------------------------------------------------------
56,780,199 1,217,192 (71,531,989)
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in units (732,031,545) 34,458,262 (430,496,105)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ILA ILA ILA ILA ILA
Treasury Treasury ILA Tax-Exempt Tax-Exempt Tax-Exempt
Obligations Instruments Federal Diversified California New York
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
======================================================================================================
<S> <C> <C> <C> <C> <C>
$ 49,882,996 $ 39,027,924 $ 127,991,600 $ 55,137,781 $ 10,292,899 $ 3,354,557
634,764 426,028 (11,971) (38,116) (4,501) --
- ------------------------------------------------------------------------------------------------------
50,517,760 39,453,952 127,979,629 55,099,665 10,288,398 3,354,557
- ------------------------------------------------------------------------------------------------------
(37,834,730) (31,147,754) (98,487,540) (50,915,901) (10,279,510) (2,746,431)
(5,921,841) (3,930,340) (26,181,728) (2,430,414) (13,389) (608,126)
(6,116,634) (3,949,830) (3,322,332) (1,791,466) -- --
(474,791) (338,176) -- -- -- --
(76,052) (43,832) -- -- -- --
(81,059) (43,878) -- -- -- --
- ------------------------------------------------------------------------------------------------------
(50,505,107) (39,453,810) (127,991,600) (55,137,781) (10,292,899) (3,354,557)
- ------------------------------------------------------------------------------------------------------
5,295,765,985 4,545,981,787 12,879,366,733 9,669,281,502 2,111,844,558 637,393,901
14,985,214 18,329,605 59,359,416 35,116,542 9,384,940 3,009,869
(5,307,633,793) (4,472,240,590) (12,558,288,438) (9,832,589,904) (2,002,625,120) (646,630,502)
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
- ------------------------------------------------------------------------------------------------------
3,130,059 92,070,944 380,425,740 (128,229,976) 118,599,877 (6,226,732)
920,413,574 686,190,156 1,971,002,416 1,569,234,551 228,188,874 123,487,337
- ------------------------------------------------------------------------------------------------------
$ 923,543,633 $ 778,261,100 $2,351,428,156 $1,441,004,575 $ 346,788,751 $117,260,605
======================================================================================================
-- -- -- $ 362,642 $ 10,495 $ 1,634
======================================================================================================
4,098,618,029 3,716,958,431 9,845,256,084 9,311,743,687 2,111,311,145 412,445,304
12,443,257 17,215,281 53,443,869 34,419,501 9,375,255 2,397,973
(4,113,675,854) (3,695,227,116) (9,792,323,613) (9,438,508,967) (2,001,353,653) (408,825,174)
- ------------------------------------------------------------------------------------------------------
(2,614,568) 38,946,596 106,376,340 (92,345,779) 119,332,747 6,018,103
- ------------------------------------------------------------------------------------------------------
852,080,094 450,755,034 2,431,546,258 230,975,117 533,413 224,948,597
2,541,957 1,065,347 5,373,341 522,467 9,685 611,896
(859,607,724) (447,499,474) (2,249,895,904) (280,499,429) (1,271,467) (237,805,328)
- ------------------------------------------------------------------------------------------------------
(4,985,673) 4,320,907 187,023,695 (49,001,845) (728,369) (12,244,835)
- ------------------------------------------------------------------------------------------------------
345,067,862 378,268,322 602,564,391 126,562,698 -- --
-- 48,977 542,206 174,574 -- --
(334,350,215) (329,514,000) (516,068,921) (113,581,508) -- --
- ------------------------------------------------------------------------------------------------------
10,717,647 48,803,299 87,037,676 13,155,764 -- --
- ------------------------------------------------------------------------------------------------------
3,117,406 92,070,802 380,437,711 (128,191,860) 118,604,378 (6,226,732)
======================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
31
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Goldman Sachs--Institutional Liquid Assets Portfolios ("ILA"). The Trust is
registered under the Investment Company Act of 1940 (as amended) as an open-end
management investment company. ILA consists of nine portfolios: Prime
Obligations, Money Market, Government, Treasury Obligations, Treasury
Instruments, Federal, Tax-Exempt Diversified, Tax-Exempt California and Tax-
Exempt New York. All of the portfolios are diversified except for the Tax-Exempt
California and Tax-Exempt New York Portfolios. ILA offers three classes of units
for each of its portfolios: ILA units, ILA Administration units and ILA Service
units. In addition, Prime Obligations offers ILA B units. The investment
objective of the Funds is to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ILA. The preparation of financial statements in conformity with
generally accepted accounting principles require management to make estimates
and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
ILA uses the amortized-cost method for valuing portfolio securities, which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
---------------
It is each portfolio's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
each year substantially all investment company taxable and tax-exempt income to
its unitholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to unitholders for financial reporting
purposes is determined in accordance with federal income tax rules. Therefore,
the source of the Portfolios' distributions may be shown in the accompanying
financial statements as either from or in excess of net investment income or net
realized gain on investment transactions, or from paid-in capital, depending on
the type of book/tax differences that may exist.
At December 31, 1996, ILA's tax year end, the following portfolios had capital
loss carryforwards for U.S. Federal tax purposes of approximately:
<TABLE>
<CAPTION>
Years of
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Federal $ 72,000 2000 to 2004
Tax-Exempt Diversified 244,000 1997 to 2004
Tax-Exempt California 30,000 1999 to 2003
Tax-Exempt New York 7,000 1999 to 2004
</TABLE>
These amounts are available to be carried forward to offset future capital gains
to the extent permitted by applicable laws or regulations.
D. Expenses--
- --------------
Expenses incurred by ILA which do not specifically relate to an individual
portfolio of ILA are allocated to the portfolios based on each portfolio's
relative average net assets for the period.
Unitholders of ILA Administration, ILA Service and ILA B units bear all
expenses and fees paid to service and distribution organizations for their
services with respect to such units as well as other expenses (subject to
expense limitations) which are directly attributable to such units.
- --------------------------------------------------------------------------------
32
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31,1996
- --------------------------------------------------------------------------------
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), acts as investment adviser pursuant to
an Advisory Agreement. Under the Advisory Agreement, GSAM, subject to general
supervision of the Trust's Board of Trustees, manages the portfolios and
provides for the administration of ILA's other affairs. As compensation for the
services rendered under the Advisory Agreement and the assumption of the
expenses related thereto, GSAM is entitled to a fee, computed daily and payable
monthly, at an annual rate equal to .35% of each portfolio's average daily net
assets. For the year ended December 31, 1996 and until further notice, GSAM has
agreed to waive advisory fees of .05%, .20%, .15%, .10% and .09% for the Money
Market, Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New
York Portfolios, respectively.
Goldman Sachs also serves as ILA's transfer agent under a Transfer Agency
Agreement for a fee. In addition, Goldman Sachs acts as ILA's distributor under
a Distribution Agreement for which it receives no compensation. Amounts due to
Goldman Sachs are included in "Accrued expenses and other liabilities" in the
accompanying Statements of Assets and Liabilities.
GSAM has voluntarily agreed that if the sum of a portfolio's expenses
(including the advisory fee, but excluding interest, taxes, brokerage
commissions, litigation and indemnification expenses, administration, authorized
dealer service, distribution and service plan fees and other extraordinary
expenses) exceeds on an annualized basis .41% of such portfolio's net assets,
the portfolio will be reimbursed in the amount of such excess monthly.
In addition, GSAM has voluntarily agreed to reimburse the Money Market,
Treasury Instruments, Federal, Tax-Exempt Diversified and Tax-Exempt New York
Portfolios to the extent that each portfolio's expenses, as defined above,
exceed .36%, .21%, .26%, .31% and .32%, respectively, of the average net assets
per annum. Amounts due from Goldman Sachs at December 31, 1996 are included in
"Other assets" in the accompanying Statements of Assets and Liabilities.
The ILA B units of Prime Obligations Portfolio have adopted a Distribution
Plan (the "Distribution Plan") pursuant to Rule 12b-1. Under the Distribution
Plan, Goldman Sachs is entitled to a quarterly fee for distribution services
equal, on an annual basis, up to .75% of ILA B units average daily net assets.
The ILA B units of Prime Obligations Portfolio have adopted an Authorized
Dealer Service Plan (the "Service Plan") pursuant to which Goldman Sachs and
Authorized Dealers are compensated for providing personal and account
maintenance services. ILA B units pay a fee under this Service Plan equal, on an
annual basis, up to .25% of ILA Class B's average daily net assets.
The chart below outlines the fee waivers and expense reimbursements for the
year ended December 31, 1996 and amounts owed to and due from Goldman Sachs at
December 31, 1996 (in thousands):
- -------------------------------------------------------------------------------
Due to
Goldman
Sachs Amounts
Adviser Expense for Adviser/ due from
Fee Reimburse- Transfer Goldman
Fund Waived ments Total Agent Fees Sachs
================================================================================
Prime
Obligations
Portfolio $-- $234 $234 $462 $18
- --------------------------------------------------------------------------------
Money
Market
Portfolio 493 243 736 318 34
- --------------------------------------------------------------------------------
Government
Portfolio -- 232 232 265 45
- --------------------------------------------------------------------------------
Treasury
Obligations
Portfolio -- 213 213 267 --
- --------------------------------------------------------------------------------
Treasury
Instruments
Portfolio 2,074 221 2,295 180 10
- --------------------------------------------------------------------------------
Federal
Portfolio 4,070 452 4,522 648 126
- --------------------------------------------------------------------------------
Tax-Exempt
Diversified
Portfolio 1,540 25 1,565 399 --
- --------------------------------------------------------------------------------
Tax-Exempt
California
Portfolio -- 22 22 147 --
- -------------------------------------------------------------------------------
Tax-Exempt
New York
Portfolio 92 16 108 26 --
- -------------------------------------------------------------------------------
33
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
4. Administration and Service Plans
ILA has adopted Administration and Service Plans. These plans allow for ILA
Administration units and ILA Service units, respectively, to compensate service
organizations for providing varying levels of account administration and
unitholder liaison services to their customers who are beneficial owners of such
units. The Administration and Service Plans provide for compensation to the
service organizations in an amount up to .15% and .40% (on an annualized basis),
respectively, of the average daily net asset value of the respective units.
5. Line of Credit Facility
ILA participates in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Portfolio must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended
December 31, 1996, ILA did not have any borrowings under this facility.
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping by the custodian.
7. Joint Repurchase Agreement Accounts
The ILA Portfolios, together with other registered investment companies having
advisory agreements with GSAM or its affiliates, may transfer uninvested cash
balances into joint accounts, the daily aggregate balances of which are invested
in one or more repurchase agreements. The underlying securities for the
repurchase agreements are U.S. Treasury obligations.
As of December 31, 1996, the Prime Obligations, Money Market, Government and
Treasury Obligations Portfolios had investments in the following joint account
of $21,400,000, $77,200,000, $305,000,000 and $327,900,000 in principal amount,
respectively. As of December 31, 1996, the repurchase agreements in this joint
account, along with the corresponding underlying securities (including the type
of security, market value, interest rate and maturity date), were as follows:
Principal Interest Maturity Amortized
Amount Rate Date Cost
================================================================================
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933
(U.S. Treasury Notes: $129,531,177, 4.75%-8.88%,01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- -------------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
================================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Portfolio may enter into
certain principal transactions, including repurchase agreements, with Goldman,
Sachs & Co. subject to certain limitations which include the following: 25% of
eligible security transactions, as defined, and 10% of repurchase agreement
transactions.
- --------------------------------------------------------------------------------
34
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Unit Outstanding Throughout Each Period
Prime Obligations Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end Total
of period income transactions operations to unitholders of period return/(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... $1.00 $0.0511 -- $0.0511 $(0.0511) $1.00 5.22%
1996-ILA Administration units ....... 1.00 0.0497 -- 0.0497 (0.0497) 1.00 5.06
1996-ILA Service units .............. 1.00 0.0474 -- 0.0474 (0.0474) 1.00 4.80
1996-ILA B units/(b)/................ 1.00 0.0262 -- 0.0262 (0.0262) 1.00 3.97/(d)/
1995-ILA units ...................... 1.00 0.0566 -- 0.0566 (0.0566) 1.00 5.79
1995-ILA Administration units ....... 1.00 0.0551 -- 0.0551 (0.0551) 1.00 5.63
1995-ILA Service units .............. 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.37
1994-ILA units ...................... 1.00 0.0394 -- 0.0394 (0.0394) 1.00 4.07
1994-ILA Administration units ....... 1.00 0.0379 -- 0.0379 (0.0379) 1.00 3.91
1994-ILA Service units .............. 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.66
1993-ILA units ...................... 1.00 0.0291 0.0002 0.0293 (0.0293) 1.00 2.97
1993-ILA Administration units ....... 1.00 0.0275 0.0003 0.0278 (0.0278) 1.00 2.82
1993-ILA Service units .............. 1.00 0.0250 0.0001 0.0251 (0.0252) 1.00 2.56
1992-ILA units ...................... 1.00 0.0364 0.0010 0.0374 (0.0374) 1.00 3.75
1992-ILA Administration units ....... 1.00 0.0339 0.0010 0.0349 (0.0349) 1.00 3.60
1992-ILA Service units .............. 1.00 0.0311 0.0010 0.0321 (0.0320) 1.00 3.34
1991-ILA units ...................... 1.00 0.0591 0.0003 0.0594 (0.0594) 1.00 6.10
1991-ILA Administration units ....... 1.00 0.0568 0.0003 0.0571 (0.0571) 1.00 5.94
1991-ILA Service units .............. 1.00 0.0558 0.0003 0.0561 (0.0561) 1.00 5.68
1990-ILA units ...................... 1.00 0.0793 -- 0.0793 (0.0793) 1.00 8.21
1990-ILA Administration units /(c)/.. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.81/(d)/
1990-ILA Service units/(c)/.......... 1.00 0.0425 -- 0.0425 (0.0425) 1.00 7.56/(d)/
1989-ILA units ...................... 1.00 0.0890 -- 0.0890 (0.0890) 1.00 9.27
1988-ILA units ...................... 1.00 0.0714 -- 0.0714 (0.0714) 1.00 7.48
1987-ILA units ...................... 1.00 0.0634 -- 0.0634 (0.0634) 1.00 6.50
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
===========================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ...................... 0.41% 5.11% $1,154,787 0.43% 5.09%
1996-ILA Administration units ....... 0.56 4.97 23,738 0.58 4.95
1996-ILA Service units .............. 0.81 4.74 84,707 0.83 4.72
1996-ILA B units/(b)/................ 1.41/(d)/ 4.09/(d)/ 346 1.43/(d)/ 4.07/(d)/
1995-ILA units ...................... 0.41 5.66 1,261,251 0.43 5.64
1995-ILA Administration units ....... 0.56 5.51 63,018 0.58 5.49
1995-ILA Service units .............. 0.81 5.22 227,233 0.83 5.20
1994-ILA units ...................... 0.40 3.94 1,963,846 0.42 3.92
1994-ILA Administration units ....... 0.55 3.79 149,234 0.57 3.77
1994-ILA Service units .............. 0.80 3.65 170,453 0.82 3.63
1993-ILA units ...................... 0.40 2.91 2,332,771 0.42 2.89
1993-ILA Administration units ....... 0.55 2.75 189,431 0.57 2.73
1993-ILA Service units .............. 0.80 2.50 137,804 0.82 2.48
1992-ILA units ...................... 0.40 3.64 3,444,591 0.42 3.62
1992-ILA Administration units ....... 0.55 3.39 257,321 0.57 3.37
1992-ILA Service units .............. 0.80 3.11 22,044 0.82 3.09
1991-ILA units ...................... 0.40 5.91 3,531,736 0.42 5.89
1991-ILA Administration units ....... 0.55 5.68 198,417 0.57 5.66
1991-ILA Service units .............. 0.80 5.58 18,789 0.82 5.56
1990-ILA units ...................... 0.38 7.93 2,833,541 0.38 7.93
1990-ILA Administration units /(c)/.. 0.55/(d)/ 7.62/(d)/ 209,272 0.55/(d)/ 7.62/(d)/
1990-ILA Service units/(c)/.......... 0.80/(d)/ 7.25/(d)/ 19,039 0.80/(d)/ 7.25/(d)/
1989-ILA units ...................... 0.40 8.90 3,761,964 0.40 8.90
1988-ILA units ...................... 0.40 7.14 3,799,628 0.40 7.14
1987-ILA units ...................... 0.40 6.34 5,814,280 0.40 6.34
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ILA Class B unit activity commenced during May of 1996.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
/(d)/Annualized.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Money Market Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. $1.00 $0.0515 $0.0001 $0.0516 $(0.0516) $1.00 5.27%
1996-ILA Administration
units ................... 1.00 0.0500 0.0001 0.0501 (0.0501) 1.00 5.12
1996-ILA Service units ..... 1.00 0.0475 0.0001 0.0476 (0.0476) 1.00 4.86
1995-ILA units ............. 1.00 0.0571 -- 0.0571 (0.0571) 1.00 5.85
1995-ILA Administration
units ................... 1.00 0.0555 -- 0.0555 (0.0555) 1.00 5.69
1995-ILA Service units ..... 1.00 0.0529 -- 0.0529 (0.0529) 1.00 5.43
1994-ILA units ............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.13
1994-ILA Administration
units ................... 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.98
1994-ILA Service units ..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.72
1993-ILA units ............. 1.00 0.0296 0.0003 0.0299 (0.0299) 1.00 3.03
1993-ILA Administration
units ................... 1.00 0.0281 0.0003 0.0284 (0.0284) 1.00 2.88
1993-ILA Service units ..... 1.00 0.0257 0.0002 0.0259 (0.0259) 1.00 2.62
1992-ILA units ............. 1.00 0.0368 0.0004 0.0372 (0.0372) 1.00 3.76
1992-ILA Administration
units ................... 1.00 0.0356 0.0004 0.0360 (0.0360) 1.00 3.61
1992-ILA Service units ..... 1.00 0.0358 0.0006 0.0364 (0.0364) 1.00 3.35
1991-ILA units ............. 1.00 0.0591 0.0004 0.0595 (0.0595) 1.00 6.12
1991-ILA Administration
units ................... 1.00 0.0574 0.0004 0.0578 (0.0578) 1.00 5.96
1991-ILA Service units ..... 1.00 0.0547 0.0004 0.0551 (0.0551) 1.00 5.70
1990-ILA units ............. 1.00 0.0793 0.0001 0.0794 (0.0794) 1.00 8.24
1990-ILA Administration
units/(c)/............... 1.00 0.0424 0.0001 0.0425 (0.0425) 1.00 7.86/(b)/
1990-ILA Service units/(c)/. 1.00 0.0438 -- 0.0438 (0.0438) 1.00 7.61/(b)/
1989-ILA units ............. 1.00 0.0885 0.0001 0.0886 (0.0886) 1.00 9.31
1988-ILA units ............. 1.00 0.0751 -- 0.0751 (0.0751) 1.00 7.66
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 1.00 0.0063 -- 0.0063 (0.0063) 1.00 7.38/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
===============================
1996-ILA units ............. 0.36% 5.15% $703,097 0.43% 5.08%
1996-ILA Administration
units ................... 0.51 5.00 257,258 0.58 4.93
1996-ILA Service units ..... 0.76 4.75 28,845 0.83 4.68
1995-ILA units ............. 0.36 5.71 574,155 0.42 5.65
1995-ILA Administration
units ................... 0.51 5.55 164,422 0.57 5.49
1995-ILA Service units ..... 0.76 5.29 23,080 0.82 5.23
1994-ILA units ............. 0.35 4.01 559,470 0.43 3.93
1994-ILA Administration
units ................... 0.50 3.88 145,867 0.58 3.80
1994-ILA Service units ..... 0.75 3.61 21,862 0.83 3.53
1993-ILA units ............. 0.35 2.96 699,604 0.43 2.88
1993-ILA Administration
units ................... 0.50 2.81 150,452 0.58 2.73
1993-ILA Service units ..... 0.75 2.57 11,166 0.83 2.49
1992-ILA units ............. 0.35 3.68 884,571 0.43 3.60
1992-ILA Administration
units ................... 0.50 3.56 187,445 0.58 3.48
1992-ILA Service units ..... 0.75 3.58 15,114 0.83 3.50
1991-ILA units ............. 0.35 5.91 1,153,191 0.42 5.84
1991-ILA Administration
units ................... 0.50 5.74 210,330 0.57 5.67
1991-ILA Service units ..... 0.75 5.47 56,586 0.82 5.40
1990-ILA units ............. 0.35 7.93 924,141 0.40 7.88
1990-ILA Administration
units/(c)/............... 0.50/(b)/ 7.63/(b)/ 204,477 0.55/(b)/ 7.58/(b)/
1990-ILA Service units/(c)/. 0.75/(b)/ 7.46/(b)/ 38,128 0.80/(b)/ 7.41/(b)/
1989-ILA units ............. 0.35 8.85 1,295,389 0.40 8.80
1988-ILA units ............. 0.27 7.51 701,105 0.40 7.38
For the Period December 2, 1987 (commencement of operations) through December 31,
================================================================================
1987-ILA units ............. 0.15/(b)/ 7.62/(b)/ 183,633 0.40/(b)/ 7.37/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Government Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (gain) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0504 $ 0.0001 $0.0505 $(0.0504) $1.00 5.15%
1996-ILA Administration
units ................... 1.00 0.0489 0.0001 0.0490 (0.0489) 1.00 4.99
1996-ILA Service units ..... 1.00 0.0463 0.0001 0.0464 (0.0463) 1.00 4.73
1995-ILA units ............. 1.00 0.0562 0.0002 0.0564 (0.0564) 1.00 5.77
1995-ILA Administration
units ................... 1.00 0.0549 0.0002 0.0551 (0.0551) 1.00 5.62
1995-ILA Service units ..... 1.00 0.0519 0.0002 0.0521 (0.0521) 1.00 5.35
1994-ILA units ............. 1.00 0.0378 0.0002 0.0380 (0.0380) 1.00 3.94
1994-ILA Administration
units ................... 1.00 0.0362 0.0002 0.0364 (0.0364) 1.00 3.79
1994-ILA Service units ..... 1.00 0.0350 0.0002 0.0352 (0.0352) 1.00 3.53
1993-ILA units ............. 1.00 0.0282 0.0008 0.0290 (0.0291) 1.00 2.94
1993-ILA Administration 1.00 0.0267 0.0008 0.0275 (0.0276) 1.00 2.79
units ...................
1993-ILA Service units ..... 1.00 0.0242 0.0006 0.0248 (0.0250) 1.00 2.53
1992-ILA units ............. 1.00 0.0338 0.0027 0.0365 (0.0364) 1.00 3.70
1992-ILA Administration
units ................... 1.00 0.0325 0.0027 0.0352 (0.0351) 1.00 3.55
1992-ILA Service units ..... 1.00 0.0309 0.0030 0.0339 (0.0336) 1.00 3.29
1991-ILA units ............. 1.00 0.0567 0.0011 0.0578 (0.0578) 1.00 5.91
1991-ILA Administration
units ................... 1.00 0.0545 0.0011 0.0556 (0.0556) 1.00 5.75
1991-ILA Service units ..... 1.00 0.0522 0.0011 0.0533 (0.0533) 1.00 5.49
1990-ILA units ............. 1.00 0.0779 0.0003 0.0782 (0.0782) 1.00 8.11
1990-ILA Administration
units (c)................ 1.00 0.0439 0.0004 0.0443 (0.0443) 1.00 7.74/(b)/
1990-ILA Service units (c).. 1.00 0.0359 0.0002 0.0361 (0.0363) 1.00 7.42/(b)/
1989-ILA units ............. 1.00 0.0877 0.0001 0.0878 (0.0878) 1.00 9.15
1988-ILA units ............. 1.00 0.0716 0.0002 0.0718 (0.0718) 1.00 7.42
1987-ILA units ............. 1.00 0.0622 0.0001 0.0623 (0.0624) 1.00 6.43
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.41% 5.04% $694,651 0.44% 5.01%
1996-ILA Administration
units ................... 0.56 4.89 36,055 0.59 4.86
1996-ILA Service units ..... 0.81 4.63 94,228 0.84 4.60
1995-ILA units ............. 0.41 5.62 570,469 0.43 5.60
1995-ILA Administration
units ................... 0.56 5.49 47,558 0.58 5.47
1995-ILA Service units ..... 0.81 5.19 85,401 0.83 5.17
1994-ILA units ............. 0.40 3.78 881,520 0.44 3.74
1994-ILA Administration
units ................... 0.55 3.62 95,483 0.59 3.58
1994-ILA Service units ..... 0.80 3.50 156,930 0.84 3.46
1993-ILA units ............. 0.40 2.82 1,315,378 0.43 2.79
1993-ILA Administration
units ................... 0.55 2.67 161,845 0.58 2.64
1993-ILA Service units ..... 0.80 2.42 101,272 0.83 2.39
1992-ILA units ............. 0.40 3.38 1,785,472 0.42 3.36
1992-ILA Administration
units ................... 0.55 3.25 461,542 0.57 3.23
1992-ILA Service units ..... 0.80 3.09 56,389 0.82 3.07
1991-ILA units ............. 0.40 5.67 2,103,627 0.43 5.64
1991-ILA Administration
units ................... 0.55 5.45 464,060 0.58 5.42
1991-ILA Service units ..... 0.80 5.22 200,176 0.83 5.19
1990-ILA units ............. 0.39 7.79 2,203,756 0.39 7.79
1990-ILA Administration
units (c)................ 0.55/(b) 7.49/(b)/ 296,313 0.55/(b)/ 7.49/(b)/
1990-ILA Service units (c).. 0.80/(b)/ 7.15/(b)/ 132,888 0.80/(b)/ 7.15/(b)/
1989-ILA units ............. 0.40 8.77 2,268,330 0.40 8.77
1988-ILA units ............. 0.40 7.16 2,197,796 0.40 7.16
1987-ILA units ............. 0.40 6.22 2,243,870 0.40 6.22
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- -------------------------------------------------------------------------------
Financial Highlights (continued)
- -------------------------------------------------------------------------------
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Obligations Portfolio
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
===================================
Net
Net asset realized Total Net asset
value at Net gain on income from value at
beginning investment investment investment Distributions end of Total
of period income transaction operation to unitholders period return/(a)/
====================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ............................. $1.00 $0.0498 $0.0002 $0.0500 $(0.0500) $1.00 5.11%
1996-ILA Administration units .............. 1.00 0.0483 0.0003 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..................... 1.00 0.0459 0.0001 0.0460 (0.0460) 1.00 4.69
1995-ILA units ............................. 1.00 0.0551 0.0007 0.0558 (0.0558) 1.00 5.73
1995-ILA Administration units .............. 1.00 0.0537 0.0007 0.0544 (0.0544) 1.00 5.57
1995-ILA Service units ..................... 1.00 0.0511 0.0007 0.0518 (0.0518) 1.00 5.31
1994-ILA units ............................. 1.00 0.0377 -- 0.0377 (0.0377) 1.00 3.91
1994-ILA Administration units .............. 1.00 0.0368 -- 0.0368 (0.0368) 1.00 3.75
1994-ILA Service units ..................... 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.49
1993-ILA units ............................. 1.00 0.0279 0.0006 0.0285 (0.0286) 1.00 2.89
1993-ILA Administration units .............. 1.00 0.0264 0.0006 0.0270 (0.0270) 1.00 2.74
1993-ILA Service units ..................... 1.00 0.0239 0.0006 0.0245 (0.0246) 1.00 2.48
1992-ILA units ............................. 1.00 0.0339 0.0025 0.0364 (0.0362) 1.00 3.65
1992-ILA Administration units .............. 1.00 0.0320 0.0023 0.0343 (0.0343) 1.00 3.49
1992-ILA Service units ..................... 1.00 0.0294 0.0024 0.0318 (0.0318) 1.00 3.23
1991-ILA units ............................. 1.00 0.0557 0.0018 0.0575 (0.0575) 1.00 5.90
1991-ILA Administration units .............. 1.00 0.0540 0.0018 0.0558 (0.0558) 1.00 5.74
1991-ILA Service units ..................... 1.00 0.0515 0.0018 0.0533 (0.0533) 1.00 5.48
1990-ILA units ............................. 1.00 0.0772 0.0002 0.0774 (0.0774) 1.00 8.05
1990-ILA Administration units /(c)/......... 1.00 0.0413 0.0002 0.0415 (0.0415) 1.00 7.67/(b)/
1990-ILA Service units /(c)/................ 1.00 0.0417 0.0003 0.0420 (0.0421) 1.00 7.42/(b)/
1989-ILA units ............................. 1.00 0.0864 0.0005 0.0869 (0.0869) 1.00 9.06
1988-ILA units ............................. 1.00 0.0704 0.0004 0.0708 (0.0708) 1.00 7.30
1987-ILA units ............................. 1.00 0.0617 0.0002 0.0619 (0.0619) 1.00 6.32
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
======================
Ratio Ratio of net Ratio of net
of net investment Net Ratio of net investment
expenses income to assets at expenses to income to
to average of average end of period average net average net
net assets net assets (in 000's) assets assets
=============================================================================
For the Years Ended December 31,
================================
1996-ILA units .................................. 0.41% 4.98% $574,734 0.43% 4.96%
1996-ILA Administration units ................... 0.56 4.83 108,850 0.58 4.81
1996-ILA Service units .......................... 0.81 4.59 123,483 0.83 4.57
1995-ILA units .................................. 0.41 5.51 711,209 0.43 5.49
1995-ILA Administration units ................... 0.56 5.37 92,643 0.58 5.35
1995-ILA Service units .......................... 0.81 5.11 119,692 0.83 5.09
1994-ILA units .................................. 0.40 3.77 713,816 0.44 3.73
1994-ILA Administration units ................... 0.55 3.68 97,626 0.59 3.64
1994-ILA Service units .......................... 0.80 3.40 108,972 0.84 3.35
1993-ILA units .................................. 0.40 2.79 969,565 0.43 2.76
1993-ILA Administration units ................... 0.55 2.64 121,327 0.58 2.61
1993-ILA Service units .......................... 0.80 2.39 185,506 0.83 2.36
1992-ILA units .................................. 0.40 3.39 1,328,036 0.43 3.36
1992-ILA Administration units ................... 0.55 3.20 152,804 0.58 3.17
1992-ILA Service units .......................... 0.80 2.94 183,208 0.83 2.91
1991-ILA units .................................. 0.40 5.57 1,709,321 0.43 5.54
1991-ILA Administration units ................... 0.55 5.40 146,795 0.58 5.37
1991-ILA Service units .......................... 0.80 5.15 154,419 0.83 5.12
1990-ILA units .................................. 0.39 7.72 1,816,991 0.39 7.72
1990-ILA Administration units /(c)/.............. 0.55/(b)/ 7.42/(b)/ 132,088 0.55/(b)/ 7.42/(b)/
1990-ILA Service units /(c)/..................... 0.80/(b)/ 7.11/(b)/ 148,323 0.80/(b)/ 7.11/(b)/
1989-ILA units .................................. 0.40 8.64 1,769,974 0.40 8.64
1988-ILA units .................................. 0.40 7.04 1,657,215 0.40 7.04
1987-ILA units .................................. 0.40 6.17 1,693,767 0.40 6.17
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Treasury Instruments Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
========================================
Net asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end Total /(a)/
of period income transcations operations unitholders of period return
===================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. $1.00 $0.0496 $0.0004 $0.0500 $(0.0500) $1.00 5.10%
1996-ILA Administration
units ................... 1.00 0.0482 0.0004 0.0486 (0.0486) 1.00 4.95
1996-ILA Service units ..... 1.00 0.0456 0.0004 0.0460 (0.0460) 1.00 4.68
1995-ILA units ............. 1.00 0.0550 0.0006 0.0556 (0.0556) 1.00 5.70
1995-ILA Administration
units ................... 1.00 0.0534 0.0007 0.0541 (0.0540) 1.00 5.54
1995-ILA Service units ..... 1.00 0.0500 0.0005 0.0505 (0.0505) 1.00 5.28
1994-ILA units ............. 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 4.01
1994-ILA Administration
units ................... 1.00 0.0397 0.0001 0.0398 (0.0398) 1.00 3.85
1994-ILA Service units ..... 1.00 0.0371 0.0001 0.0372 (0.0372) 1.00 3.59
1993-ILA units ............. 1.00 0.0288 0.0006 0.0294 (0.0294) 1.00 2.98
1993-ILA Administration
units ................... 1.00 0.0273 0.0006 0.0279 (0.0279) 1.00 2.83
1993-ILA Service units ..... 1.00 0.0248 0.0006 0.0254 (0.0254) 1.00 2.57
1992-ILA units ............. 1.00 0.0338 0.0012 0.0350 (0.0350) 1.00 3.54
1992-ILA Administration
units ................... 1.00 0.0326 0.0012 0.0338 (0.0338) 1.00 3.38
1992-ILA Service units ..... 1.00 0.0275 0.0011 0.0286 (0.0286) 1.00 3.13
For the Period January 30, 1991 (commencement of operations) through December 31,
=================================================================================
1991-ILA units ............. 1.00 0.0486 0.0013 0.0499 (0.0499) 1.00 5.75/(b)/
1991-ILA Administration
units /(c)/.............. 1.00 0.0210 0.0010 0.0220 (0.0220) 1.00 5.21/(b)/
1991-ILA Service units /(c)/ 1.00 0.0473 0.0009 0.0482 (0.0482) 1.00 5.33/(b)/
</TABLE>
<TABLE>
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
====================================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
=============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
================================
1996-ILA units ............. 0.21% 4.96% $708,999 0.43% 4.74%
1996-ILA Administration
units ................... 0.36 4.82 137,706 0.58 4.60
1996-ILA Service units ..... 0.61 4.56 383,901 0.83 4.34
1995-ILA units ............. 0.21 5.50 586,294 0.44 5.27
1995-ILA Administration
units ................... 0.36 5.34 68,713 0.59 5.11
1995-ILA Service units ..... 0.61 5.00 123,254 0.84 4.77
1994-ILA units ............. 0.20 3.96 547,351 0.43 3.73
1994-ILA Administration
units ................... 0.35 3.97 64,388 0.58 3.74
1994-ILA Service units ..... 0.60 3.72 74,451 0.83 3.49
1993-ILA units ............. 0.20 2.88 456,411 0.44 2.64
1993-ILA Administration
units ................... 0.35 2.73 26,553 0.59 2.49
1993-ILA Service units ..... 0.60 2.48 34,014 0.84 2.24
1992-ILA units ............. 0.18 3.38 422,506 0.45 3.11
1992-ILA Administration
units ................... 0.33 3.26 6,915 0.60 2.99
1992-ILA Service units ..... 0.58 2.75 29,522 0.85 2.48
For the Period January 30, 1991 through December 31,
====================================================
1991-ILA units ............. 0.10/(b)/ 5.28/(b)/ 424,436 0.45/(b)/ 4.93/(b)/
1991-ILA Administration
units /(c)/.............. 0.25/(b)/ 4.77/(b)/ 17,649 0.60/(b)/ 4.42/(b)/
1991-ILA Service units /(c)/ 0.50/(b)/ 5.13/(b)/ 9,430 0.85/(b)/ 4.78/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during July and
January of 1991, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Federal Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Net
asset Net realized Total
value at gain income Net asset
beginning Net on from Distributions value at
of investment investment investment to end Total
period income transactions operations unitholders of period return(a)
======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... $1.00 $0.0513 -- $0.0513 $(0.0513) $1.00 5.24%
1996-ILA Administration units......... 1.00 0.0498 -- 0.0498 (0.0498) 1.00 5.09
1996-ILA Service units ............... 1.00 0.0473 -- 0.0473 (0.0473) 1.00 4.83
1995-ILA units ....................... 1.00 0.0569 -- 0.0569 (0.0569) 1.00 5.83
1995-ILA Administration units ........ 1.00 0.0550 -- 0.0550 (0.0550) 1.00 5.67
1995-ILA Service units ............... 1.00 0.0522 -- 0.0522 (0.0522) 1.00 5.41
1994-ILA units ....................... 1.00 0.0407 -- 0.0407 (0.0407) 1.00 4.11
1994-ILA Administration units ........ 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.95
1994-ILA Service units ............... 1.00 0.0392 -- 0.0392 (0.0392) 1.00 3.69
1993-ILA units ....................... 1.00 0.0296 -- 0.0296 (0.0296) 1.00 3.00
1993-ILA Administration units ........ 1.00 0.0281 -- 0.0281 (0.0281) 1.00 2.84
1993-ILA Service units/(c)/........... 1.00 0.0157 -- 0.0157 (0.0157) 1.00 2.56/(b)/
1992-ILA units ....................... 1.00 0.0358 -- 0.0358 (0.0358) 1.00 3.61
1992-ILA Administration units ........ 1.00 0.0340 -- 0.0340 (0.0340) 1.00 3.46
1991-ILA units ....................... 1.00 0.0576 -- 0.0576 (0.0576) 1.00 5.94
1991-ILA Administration units ........ 1.00 0.0542 -- 0.0542 (0.0542) 1.00 5.78
1991-ILA Service units/(c)/........... 1.00 0.0196 -- 0.0196 (0.0196) 1.00 5.55/(b)/
1990-ILA units ....................... 1.00 0.0772 -- 0.0772 (0.0772) 1.00 8.06
1990-ILA Administration units/(d)/.... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 7.39/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 1.00 0.0516 -- 0.0516 (0.0516) 1.00 7.62(b)
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
---------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
====================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------
1996-ILA units ....................... 0.26% 5.13% $2,303,677 0.43% 4.96%
1996-ILA Administration units......... 0.41 4.98 794,537 0.58 4.81
1996-ILA Service units ............... 0.66 4.73 192,416 0.83 4.56
1995-ILA units ....................... 0.26 5.69 1,731,935 0.42 5.53
1995-ILA Administration units ........ 0.41 5.50 516,917 0.57 5.34
1995-ILA Service units ............... 0.66 5.22 102,576 0.82 5.06
1994-ILA units ....................... 0.25 4.07 1,625,567 0.42 3.90
1994-ILA Administration units ........ 0.40 3.88 329,896 0.57 3.71
1994-ILA Service units ............... 0.65 3.92 15,539 0.82 3.75
1993-ILA units ....................... 0.25 2.96 1,430,292 0.42 2.79
1993-ILA Administration units ........ 0.40 2.81 362,401 0.57 2.64
1993-ILA Service units/(c)/........... 0.65/(b)/ 2.54/(b)/ 1,425 0.82/(b)/ 2.37/(b)/
1992-ILA units ....................... 0.25 3.58 1,600,989 0.42 3.41
1992-ILA Administration units ........ 0.40 3.40 312,792 0.57 3.23
1991-ILA units ....................... 0.25 5.76 1,656,232 0.42 5.59
1991-ILA Administration units ........ 0.40 5.42 291,810 0.57 5.25
1991-ILA Service units/(c)/........... 0.65/(b)/ 5.56/(b)/ -- 0.82/(b)/ 5.39/(b)/
1990-ILA units ....................... 0.25 7.72 1,368,765 0.40 7.57
1990-ILA Administration units/(d)/.... 0.40/(b)/ 7.25/(b)/ 90,748 0.55/(b)/ 7.10/(b)/
For the Period May 22, 1989 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------
1989-ILA units ....................... 0.19/(b)/ 8.41/(b)/ 455,230 0.40/(b)/ 8.20/(b)/
</TABLE>
- ----------------
/(a)/ Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/ Annualized.
/(c)/ ILA Service unit activity commenced during April of 1991; no shares were
outstanding during the period from August 7, 1991 through May 15, 1993.
(d)ILA Administration unit activity commenced during September of 1990.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
Goldman Sachs--Institutional Liquid Assets
- ------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt Diversified Portfolio
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
======================================
Net
Net asset realized Total Net asset
value at Net gain(loss) income from value at
beginning investment on investment investment Distributions end of Total
of period income transactions operations to unitholders period return/(a)/
===============================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C> <C> <C>
1996-ILA units ..................... $1.00 $0.0320 $ $0.0320 $(0.0320) $1.00 3.25%
1996-ILA Administration units....... 1.00 0.0306 -- 0.0306 (0.0306) 1.00 3.09
1996-ILA Service units ............. 1.00 0.0279 -- 0.0279 (0.0279) 1.00 2.84
1995-ILA units ..................... 1.00 0.0365 -- 0.0365 (0.0365) 1.00 3.72
1995-ILA Administration units....... 1.00 0.0351 -- 0.0351 (0.0352) 1.00 3.57
1995-ILA Service units ............. 1.00 0.0324 -- 0.0324 (0.0325) 1.00 3.31
1994-ILA units ..................... 1.00 0.0264 -- 0.0264 (0.0264) 1.00 2.71
1994-ILA Administration units....... 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.55
1994-ILA Service units ............. 1.00 0.0220 -- 0.0220 (0.0220) 1.00 2.30
1993-ILA units ..................... 1.00 0.0222 -- 0.0222 (0.0222) 1.00 2.25
1993-ILA Administration units....... 1.00 0.0207 -- 0.0207 (0.0207) 1.00 2.09
1993-ILA Service units ............. 1.00 0.0183 -- 0.0183 (0.0183) 1.00 1.84
1992-ILA units ..................... 1.00 0.0277 -- 0.0277 (0.0277) 1.00 2.82
1992-ILA Administration units....... 1.00 0.0266 -- 0.0266 (0.0266) 1.00 2.67
1992-ILA Service units ............. 1.00 0.0243 -- 0.0243 (0.0243) 1.00 2.41
1991-ILA units ..................... 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.33
1991-ILA Administration units....... 1.00 0.0406 -- 0.0406 (0.0406) 1.00 4.17
1991-ILA Service units ............. 1.00 0.0386 -- 0.0386 (0.0386) 1.00 3.91
1990-ILA units ..................... 1.00 0.0550 (0.0001) 0.0549 (0.0549) 1.00 5.64
1990-ILA Administration units /(c)/. 1.00 0.0301 -- 0.0301 (0.0300) 1.00 5.43/(b)/
1990-ILA Service units /(c)/........ 1.00 0.0259 -- 0.0259 (0.0259) 1.00 5.17/(b)/
1989-ILA units ..................... 1.00 0.0591 (0.0001) 0.0590 (0.0590) 1.00 6.07
1988-ILA units ..................... 1.00 0.0487 0.0003 0.0490 (0.0490) 1.00 5.03
1987-ILA units ..................... 1.00 0.0413 (0.0003) 0.0410 (0.0410) 1.00 4.23
<CAPTION>
Ratio assuming no
waiver of fees and no
expense limitation
==============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===================================================================================
For the Years Ended December 31,
================================
<S> <C> <C> <C> <C> <C>
1996-ILA units ..................... 0.31% 3.20% $1,514,443 0.41% 3.10%
1996-ILA Administration units....... 0.46 3.06 59,097 0.56 2.96
1996-ILA Service units ............. 0.71 2.79 28,921 0.81 2.69
1995-ILA units ..................... 0.31 3.65 $1,342,585 0.42 3.54
1995-ILA Administration units....... 0.46 3.51 48,773 0.57 3.40
1995-ILA Service units ............. 0.71 3.24 49,647 0.82 3.13
1994-ILA units ..................... 0.30 2.64 1,434,965 0.41 2.53
1994-ILA Administration units....... 0.45 2.50 97,778 0.56 2.39
1994-ILA Service units ............. 0.70 2.20 36,492 0.81 2.09
1993-ILA units ..................... 0.30 2.22 1,769,477 0.41 2.11
1993-ILA Administration units....... 0.45 2.08 99,896 0.56 1.97
1993-ILA Service units ............. 0.70 1.83 45,172 0.81 1.72
1992-ILA units ..................... 0.30 2.77 1,333,925 0.42 2.65
1992-ILA Administration units....... 0.45 2.66 50,225 0.57 2.54
1992-ILA Service units ............. 0.70 2.43 29,534 0.82 2.31
1991-ILA units ..................... 0.32 4.24 1,044,986 0.42 4.14
1991-ILA Administration units....... 0.47 4.06 37,567 0.57 3.96
1991-ILA Service units ............. 0.72 3.86 52,399 0.82 3.76
1990-ILA units ..................... 0.40 5.50 603,895 0.40 5.50
1990-ILA Administration units /(c)/. 0.55/(b)/ 5.40/(b)/ 42,498 0.55/(b)/ 5.40/(b)/
1990-ILA Service units /(c)/........ 0.80/(b)/ 5.16/(b)/ 56,810 0.80/(b)/ 5.16/(b)/
1989-ILA units ..................... 0.40 5.91 688,556 0.40 5.91
1988-ILA units ..................... 0.40 4.87 907,782 0.40 4.87
1987-ILA units ..................... 0.40 4.13 965,714 0.40 4.13
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during June and July
of 1990, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
41
<PAGE>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt California Portfolio
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net (loss) on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. $1.00 $0.0299 -- $0.0299 $(0.0299) $1.00 3.03%
1996-ILA Administration
units ................... 1.00 0.0284 -- 0.0284 (0.0284) 1.00 2.88
1995-ILA units ............. 1.00 0.0349 -- 0.0349 (0.0350) 1.00 3.55
1995-ILA Administration
units ................... 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.40
1994-ILA units ............. 1.00 0.0250 -- 0.0250 (0.0250) 1.00 2.53
1994-ILA Administration
units ................... 1.00 0.0233 -- 0.0233 (0.0233) 1.00 2.37
1993-ILA units ............. 1.00 0.0206 -- 0.0206 (0.0206) 1.00 2.09
1993-ILA Administration
units ................... 1.00 0.0191 -- 0.0191 (0.0191) 1.00 1.93
1993-ILA Service units ..... 1.00 0.0166 -- 0.0166 (0.0166) 1.00 1.68
1992-ILA units ............. 1.00 0.0256 (0.0001) 0.0255 (0.0256) 1.00 2.62
1992-ILA Administration
units ................... 1.00 0.0235 (0.0002) 0.0233 (0.0235) 1.00 2.47
1992-ILA Service units (c).. 1.00 0.0081 -- 0.0081 (0.0081) 1.00 1.99/(b)/
1991-ILA units ............. 1.00 0.0388 -- 0.0388 (0.0388) 1.00 3.92
1991-ILA Administration
units ................... 1.00 0.0376 -- 0.0376 (0.0376) 1.00 3.80
1990-ILA units ............. 1.00 0.0511 (0.0001) 0.0510 (0.0511) 1.00 5.24
1990-ILA Administration
units (c)................ 1.00 0.0042 -- 0.0042 (0.0042) 1.00 5.14/(b)/
1989-ILA units ............. 1.00 0.0573 (0.0001) 0.0572 (0.0572) 1.00 5.93
For the Period October 3, 1988 (commencement of operations) through
December 31,
=========================================================
1988-ILA units ............. 1.00 0.0139 -- 0.0139 (0.0139) 1.00 5.81/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended
December 31,
==========================
1996-ILA units ............. 0.41% 2.99% $440,476 0.42% 2.98%
1996-ILA Administration
units ................... 0.56 2.84 142 0.57 2.83
1995-ILA units ............. 0.41 3.49 346,728 0.41 3.49
1995-ILA Administration
units ................... 0.56 3.32 61 0.56 3.32
1994-ILA units ............. 0.40 2.50 227,399 0.41 2.49
1994-ILA Administration
units ................... 0.55 2.33 790 0.56 2.32
1993-ILA units ............. 0.40 2.06 229,839 0.44 2.02
1993-ILA Administration
units ................... 0.55 1.91 1,425 0.59 1.87
1993-ILA Service units ..... 0.76 1.66 -- 0.84 1.54
1992-ILA units ............. 0.40 2.56 161,868 0.47 2.49
1992-ILA Administration
units ................... 0.55 2.35 31 0.62 2.28
1992-ILA Service units (c).. 0.80/(b)/ 3 0.87/(b)/ 1.96/(b)/
2.03(b)
1991-ILA units ............. 0.40 3.88 102,494 0.47 3.81
1991-ILA Administration
units ................... 0.55 3.76 13 0.62 3.69
1990-ILA units ............. 0.40 5.11 106,972 0.40 5.11
1990-ILA Administration
units (c)................ 0.55/(b)/ 5.33(b) 68 0.55/(b)/ 5.33/(b)/
1989-ILA units ............. 0.40 5.73 112,463 0.40 5.73
For the Period October 3, 1988 (commencement of
operations) through December 31,
=========================================================
1988-ILA units ............. 0.24/(b)/ 5.74/(b)/ 41,028 0.38/(b)/ 5.60/(b)/
- -------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration and Service unit activity commenced during December of
1990 and August of 1992, respectively. No service shares were outstanding
for the years ended December 31, 1996, 1995, 1994.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
42
<PAGE>
<TABLE>
<CAPTION>
Goldman Sachs Money Market Trust--Institutional Liquid Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Unit Outstanding Throughout Each Period
Tax-Exempt New York Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Income from investment operations
----------------------------------------
Net asset Net realized Total Net asset
value at Net loss income from value at
beginning investment on investment investment Distribution end Total
of period income transactions operations to unitholders of period return(a)
=============================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... $1.00 $0.0301 -- $0.0301 $(0.0301) $1.00 3.05%
1996-ILA Administration units ...... 1.00 0.0288 -- 0.0288 (0.0288) 1.00 2.90
1995-ILA units ..................... 1.00 0.0344 -- 0.0344 (0.0344) 1.00 3.51
1995-ILA Administration units ...... 1.00 0.0328 -- 0.0328 (0.0328) 1.00 3.35
1994-ILA units ..................... 1.00 0.0262 -- 0.0262 (0.0262) 1.00 2.56
1994-ILA Administration units ...... 1.00 0.0247 -- 0.0247 (0.0247) 1.00 2.41
1993-ILA units ..................... 1.00 0.0221 -- 0.0221 (0.0221) 1.00 2.21
1993-ILA Administration units ...... 1.00 0.0205 -- 0.0205 (0.0205) 1.00 2.05
1992-ILA units ..................... 1.00 0.0265 -- 0.0265 (0.0265) 1.00 2.71
1992-ILA Administration units ...... 1.00 0.0253 -- 0.0253 (0.0253) 1.00 2.55
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 1.00 0.0347 (0.0002) 0.0345 (0.0347) 1.00 4.02/(b)/
1991-ILA Administration units /(c)/. 1.00 0.0330 -- 0.0330 (0.0330) 1.00 3.87/(b)/
- --------------------
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
------------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net of period average net average net
assets assets (in 000's) assets assets
============================================================================
<S> <C> <C> <C> <C> <C>
For the Years Ended December 31,
- ---------------------------------
1996-ILA units ..................... 0.32% 3.01% $70,175 0.43% 2.90%
1996-ILA Administration units ...... 0.47 2.88 44,319 0.58 2.77
1995-ILA units ..................... 0.30 3.44 90,537 0.44 3.30
1995-ILA Administration units ...... 0.45 3.28 26,724 0.59 3.14
1994-ILA units ..................... 0.24 2.62 84,517 0.47 2.39
1994-ILA Administration units ...... 0.39 2.47 38,970 0.62 2.24
1993-ILA units ..................... 0.10 2.21 48,367 0.51 1.80
1993-ILA Administration units ...... 0.25 2.05 20,306 0.66 1.64
1992-ILA units ..................... 0.10 2.65 16,844 0.57 2.18
1992-ILA Administration units ...... 0.25 2.53 14,641 0.72 2.06
For the Period February 15, 1991 (commencement of operations) through December 31,
- -----------------------------------------------------------------------------------
1991-ILA units ..................... 0.10/(b)/ 3.96/(b)/ 11,070 0.76/(b)/ 3.30/(b)/
1991-ILA Administration units/(c)/.. 0.25/(b)/ 3.90/(b)/ 19,198 0.91/(b)/ 3.24/(b)/
</TABLE>
- -------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/ILA Administration unit activity commenced during February of 1991.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Unitholders and Board of Trustees of Goldman Sachs Money Market
Trust--Institutional Liquid Assets:
We have audited the accompanying statements of assets and liabilities of
Goldman Sachs Money Market Trust--Institutional Liquid Assets (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Government,
Treasury Obligations, Treasury Instruments, Federal, Tax-Exempt Diversified,
Tax-Exempt California and Tax-Exempt New York Portfolios), including the
statements of investments as of December 31, 1996, and the related statements of
operations for the year then ended, and the statements of changes in net assets
and the financial highlights for the periods presented. These financial
statements and the financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Institutional Liquid Assets as of December 31, 1996, the results
of their operations for the year then ended, the changes in their net assets and
the financial highlights for the periods presented, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- -------------------------------------- ----------------------------------------
44
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- -----------------------------------------
[This page intentionally left blank]
- -------------------------------------- -----------------------------------------
45
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------ -----------------------------------------
[This page intentionally left blank]
- ------------------------------------ -----------------------------------------
46
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- ---------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market
Trust--Institutional Liquid Assets Portfolios' Prospectus which contains facts
concerning each Fund's objectives and policies, management, expenses and other
information.
- --------------------------------------------------------------------------------
47
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Institutional
Liquid Assets
- --------------------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Portfolio
Money Market Portfolio
Government Portfolio
Treasury Obligations Portfolio
Treasury Instruments Portfolio
Federal Portfolio
Tax-Exempt Diversified Portfolio
Tax-Exempt California Portfolio
Tax-Exempt New York Portfolio
[LOGO OF GOLDMAN SACHS APPEARS HERE]
================================================================================
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS/1/
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories.
The modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
Short-Term Ratings
- ------------------
P-1: Issuers have a superior ability for repayment of senior short-term debt
obligations. Prime-1 or P-1 repayment ability will often be evidenced by many of
the following characteristics:
. Leading market positions in well established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
A-1
<PAGE>
. Well established access to a range of financial markets and assured
sources of alternate liquidity.
P-2: Issuers have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
State and Municipal Obligations
- -------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements are
critical in short-term ratings, while other factors of major importance in bond
risk, long-term secular trends for example, may be less important over the short
run. Symbols used will be as follows:
MIG 1/VMIG 1 -- This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand
feature-variable rate demand obligation. Such ratings will be designated as
VMIG to reflect such characteristics as payment upon periodic demand rather than
fixed maturity dates and payment relying on external liquidity. Additionally,
investors should be alert to the fact that the source of payment may be limited
to the external liquidity with no or limited legal recourse to the issuer in the
event the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rated categories. However, the
A-2
<PAGE>
obligor's capacity to meet its financial commitment on the obligation is still
strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the
addition of a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
. Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues
determined to possess very strong characteristics will be given a plus (+)
designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for
A-3
<PAGE>
bonds to denote the long-term maturity and the commercial paper rating symbols
for the put option (for example, "AAA/A-1+"). With short-term demand debt,
S&P's note rating symbols are used with the commercial paper rating symbols (for
example, "SP-1+/A-1+").
DUFF & PHELPS, INC.
Bond Ratings
- ------------
AAA: The highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and -, in the AA and A categories for
long-term fixed income securities. The modifier + indicates that the security
ranks in the higher end of the category: the modifier AA or A indicates a mid-
range ranking; and the modifier - indicates that the issue ranks in the lower
end of the category.
Short-Term Ratings
- ------------------
D-1: Commercial paper and certificates of deposit rated Duff 1 are
considered to have a very high certainty of timely payment. Liquidity factors
are excellent and are supported by strong fundamental protection factors. Risk
factors are minor.
D-2: Commercial paper and certificates of deposit rated Duff 2 are
considered to have a good certainty of timely payment. Liquidity factors and
company fundamentals are considered sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good and risk
factors are small.
Duff & Phelps applies a plus and minus rating scale, D-1+ , D-1 and D-1- in
the Duff 1 top grade category for short-term debt. The rating D-1+ indicates
that the security has the highest certainty of timely payment, short-term
liquidity is clearly 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.
A-4
<PAGE>
FITCH INVESTORS SERVICE CORP.
AAA: Bonds which are rated AAA are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay its obligations, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds which are rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issuers
is generally rated F-1+.
A: Bonds which are rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories
to indicate the relative position of a credit within the rating category.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes. The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very
strong credit quality. Those issues determined to possess exceptionally strong
credit quality and having the strongest degree of assurance for timely payment
will be denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good
credit quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity
for timely repayment. Where issues possess a particularly strong credit feature
a rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfactory
capacity for timely repayment, although such capacity may be susceptible to
adverse changes in business, economic or financial conditions.
A-5
<PAGE>
THOMSON BANKWATCH, INC.
AAA: The highest category; indicates an extremely high ability to repay
principal and interest on a timely basis.
AA: The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk,
compared to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal
and interest is strong. Issues rated A could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative degree of
safety is not as high as for issues rated TBW-1.
/1/ The ratings indicated herein are believed to be the most recent ratings
available at the date of this Statement of Additional Information for the
securities listed. Ratings are generally given to securities at the time
of issuance. While the rating agencies may from time to time revise such
ratings, they undertake no obligation to do so, and the ratings indicated
do not necessarily represent ratings which will be given to these
securities on the date of the Portfolios' taxable year end.
A-6
<PAGE>
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 an 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 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 Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, 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 personal computer
software system
<PAGE>
which 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
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
-------------
<S> <C>
Investment Policies and Practices
of the Funds 4
Investment Limitations 17
Trustees and Officers 22
The Adviser, Distributor and Transfer
Agent 28
Portfolio Transactions 33
Net Asset Value 35
Redemptions 37
Calculation of Yield Quotations 38
Tax Information 42
Organization and Capitalization 47
Custodian and Subcustodian 52
Independent Accountants 52
Financial Statements 52
Appendix A (Description of Securities
Ratings) A-1
</TABLE>
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 guaran-
tee 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 enter into repurchase
agreements only with primary dealers in U.S. Government Securities. A
repurchase agreement is an arrangement under which the purchaser (i.e., the
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 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, install-
ment 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, a Fund 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 Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets
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 any net capital gains
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
9
<PAGE>
maintain in a segregated account cash or liquid assets 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
10
<PAGE>
be eligible for purchase by a Fund, a variable or floating rate 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 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
11
<PAGE>
Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board of Trustees, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance 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
12
<PAGE>
such custodial receipts are excluded from gross income for 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
13
<PAGE>
industrial user. Tax-Free Fund does not intend to invest in 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 finan-
cial 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
14
<PAGE>
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 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
15
<PAGE>
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 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,
16
<PAGE>
the policy of each Fund that may enter into such 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 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 (except for Government
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 the 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 and 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 such 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 that (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through re verse repurchase agreements in
amounts up to 33/1/3/% of its total assets (including the amount borrowed),
(b) the Fund may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes, (c) the Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of port-
18
<PAGE>
folio securities, and (d) the Fund may purchase securities on margin to the
extent permitted by applicable law.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each 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 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.
Government Fund may not:
(1) with respect to 75% of its total assets taken at market value, invest more
than 5% of the value of the total assets of that Fund in the securities of any
one issuer, except U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. This restriction does not,
however, apply to any Fund classified as a non-diversified company under the
Investment Company Act;
(2) with respect to 75% of its total assets taken at market value, purchase the
securities of any one issuer if, as a result of such purchase, that Fund would
hold more than 10% of the outstanding voting securities of that issuer. This
restriction does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act;
(3) borrow money, except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowings and that no purchases of securities will be made if
such borrowings exceed 5% of the value of the Fund's assets. This restriction
does not apply to cash collateral received as a result of portfolio securities
lending;
19
<PAGE>
(4) mortgage, pledge or hypothecate its assets except to secure permitted
borrowings;
(5) act as underwriter of the securities issued by others, except to the extent
that the purchase of securities in accordance with a Fund's investment
objective and policies directly from the issuer thereof and the later
disposition thereof may be deemed to be underwriting;
(6) purchase securities if such purchase would cause more than 25% 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, provided that there is no limitation with respect to, and
the Fund reserves freedom of action, when otherwise consistent with its
investment policies to, concentrate its investments in, U.S. Government
securities, obligations (other than commercial paper) issued or guaranteed by
U.S. banks, and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by U.S. Government securities or such bank
obligations. (For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be industries,
and 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.
Such concentration may be effected when the Adviser determines that risk
adjusted returns in such industries are considered favorable relative to other
industries.)
(7) issue senior securities, except as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust;
(8) purchase or sell real estate (excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodities contracts. The Trust reserves the freedom to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities;
(9) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and entry into
repurchase agreements in accordance with such Fund's investment objective and
policies may be deemed to be loans;
(10) purchase securities on margin (except for delayed delivery or when-issued
transactions or such short-term credits as are necessary for the clearance of
transactions), make short sales of securities, maintain a short position, or
invest in or write puts, calls or combinations thereof (except that a Fund may
20
<PAGE>
acquire puts in connection with the acquisition of a debt instrument);
(11) invest in other companies for the purpose of exercising control or
management.
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.
As money market funds, the Funds 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 Fund's portfolio may not exceed
397 days and a Fund'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 Fund, other
than the Tax-Exempt Funds, as a matter of non-funda mental policy only invests
in First Tier securities. Portfolio diversification. The Prime Obligations,
Money Market Plus, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Free Money Market Funds may not invest more than
5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such
21
<PAGE>
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. 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 Fund , no more than 10%
of the Fund'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 Funds (which are
the only Funds that may 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 Funds' total assets may be invested in securities or puts issued by
the institution that issued the put. The Tax-Exempt Fund's investment in Second
Tier securities that are conduit securities, which are municipal securities
involving an agreement or arrangement providing for payment by a person other
than the issuer of the municipal security, that are not subject to an
unconditional demand feature, may not exceed 5% of the Fund's total assets and
the Fund's investment in such conduit securities issued by any issuer may not
exceed 1% of the Fund's total assets. Securities which are rated in the highest
short-term rating category by at least two Nationally Recognized Statistical
Rating Organizations ("NRSROs"), or if only one NRSRO has assigned a rating, by
that NRSRO, are "First Tier Securities". Securities rated in the top two short-
term rating categories by at least two NRSROs, but which are not First Tier
Securities are "Second Tier Securities." NRSROs include S&P, Moody's, Fitch
Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thomson BankWatch, Inc. For a description of their rating
categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a 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.
22
<PAGE>
<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); Senior
Vice President of Scott Paper Company
until June 1994; Director of Arkwright
Mutual Insurance Company; Trustee of
International House of Philadelphia;
Member of Cornell University Council;
Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-1996); Co-
Head of GSAM (since December 1994).
*Douglas C. Grip, 35 Trustee & Vice President, Goldman Sachs
One New York Plaza President (since May 1996); President, MFS
New York, NY 10004 Retirement Services Inc., of Massachu-
setts Financial Services (prior
thereto).
*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);
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
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
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).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza Commonwealth, Inc. (a managed dental
#218 care company, (since January 1996);
Northfield, IL 60093 Chairman and Chief Executive Officer,
MSP Communications Inc. (a company
engaged in radio broadcasting) (since
November 1988); Director, Federal
Express Corporation (since 1976),
Evanston Hospital Corporation (since
1980), First Commonwealth, Inc. (since
1988) and North American Private Equity
Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer of Ameritech (a
Lake Forest, IL 60045 telecommunications holding
company,(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug
store business); Director of Baker,
Fentress & Co. (a closed-end, management
investment company.
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. (since 1990); President and Chief
Suite 1400 Executive Officer, Microdot, Inc.
Chicago, IL 60602 (a diversified manufacturer of fastening
systems and
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ---------- -----------------------------
<S> <C> <C>
connectors)(January 1984 to
October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza GSAM (since April 1994); Assistant
New York, NY 10004 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 Investors Bank and Trust
10004 Company (November 1993 to July 1995); Audit
Manager of Arthur Andersen LLP (prior
thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since
4900 Sears Tower President June 1992); Director, Shareholder Servicing
Chicago, IL of GSAM (since June 1992).
60606
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL November 1989).
60606
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY Vice President and Assistant
10004 General Counsel of Goldman
Sachs (since June 1992);
Counsel to the Funds Group,
GSAM (since June 1992);
Partner, Hale and Dorr (Sep-
tember 1991 to June 1992).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Howard B. Surloff, 31 Assistant Assistant General Counsel and
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, GSAM (since November 1993); Asso-
ciate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since March
1997); Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, Assistant Legal Products Analyst,
33 Secretary Goldman Sachs (June 1993 to
85 Broad Street present); Funds Compliance
New York, NY 10004 Officer, Citibank Global Asset
Management (August 1991 to June 1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM (since 1988).
New York, NY 10004
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (since 1995-1996); 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 1,
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.
26
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman 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.** $28,050 $0 $62,450
Ashok N. Bakhru $35,126 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $29,198 $0 $58,954
William H. Springer $29,198 $0 $58,954
Richard P. Strubel $29,198 $0 $58,594
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including
the five Funds in existence on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
27
<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 certain
other expenses (excluding management fees, fees payable to Service
Organizations, 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 a
portion of its management fee.
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 Funds' custodian, fees and
expenses of the Funds' transfer agent, filing fees for the registration or
qualification of shares under federal or state securities laws, expenses of the
organization of the Funds, 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 Funds 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, their proportionate share of the compensation and
expenses of the Trust's "non-interested" Trustees, and extraordinary expenses
incurred by the Funds.
28
<PAGE>
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory and administration agreements. Effective May 1, 1997 the services
under such agreements were combined in the Management Agreement. The services
required to be performed for the Funds and the combined advisory and
administration fees payable by the Funds under the former advisory and
administration agreements are identical to the services and fees under the
Management Agreement. For the fiscal years ended December 31, 1996 and December
31, 1995 and the eleven months ended December 31, 1994 the amounts of the
management fee (including both advisory and administration fees) incurred by
each Fund were as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
----------- ----------- -----------
<S> <C> <C> <C>
Prime Obligations Fund $8,504,328 $7,194,392 $3,485,286
Money Market Fund/(1)/ 5,131,644 3,236,027 900,121
Treasury Obligations Fund 4,121,944 2,401,903 1,186,773
Government Fund 2,179,655 1,119,731 243,841
Tax-Free Money Market Fund/(2)/ 930,176 459,413 35,436
- ------------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ Commenced operations July 19, 1994.
GSAM has agreed that it will not impose a portion of its manage ment fee. Had
such fees been imposed, the following additional fees (including both advisory
and administration fees) would have been incurred by these Funds for the periods
indicated:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Fund $1,750,891 $3,173,924 $1,609,383
Money Market Fund/(1)/ 1,142,133 1,063,477 482,154
Treasury Obligations Fund 848,635 1,747,326 554,447
Government Fund 448,753 493,804 159,290
Tax-Free Money Market Fund/(2)/ 219,242 304,151 109,909
- ---------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ 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 Funds' shareholders approved the Management Agreement on April 21,
1997. The Manage ment 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 Fund (as defined
in the Investment Company Act) and, in either case, by a majority of "non-
interested" Trustees.
29
<PAGE>
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.
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 Funds would have incurred the following additional expenses:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Prime Obligations Fund $637,605 $382,318 $ -0-
Money Market Fund 456,796 420,234 N/A
Treasury Obligations 551,885 280,395 -0-
Government Fund 352,113 197,008 98,125
Tax-Free Money Market Fund 83,097 83,376 N/A
- --------------------------
</TABLE>
Each Fund may use any name derived from the name "Goldman Sachs" only as long as
its Management Agreement remains in effect. The 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 60 days' written notice to the Trust.
In managing the Tax-Free Money Market and Municipal Money Market Funds, 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 adminis trative and economic
characteristics.
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 with the Funds.
30
<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 29, 1996, Goldman Sachs
and its consolidated subsidiaries had assets of approximately $152 billion and
partners' capital of $5.2 billion. Goldman Sachs became registered as an
investment adviser in 1981. As of March 24, 1997, Goldman Sachs, together with
its affiliates, acted as investment adviser, administrator or distributor for
approximately $104.9 billion in total assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
- ----------------------------------------------------------------------------
GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and their
- -------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the Adviser and
its advisory affiliates have proprietary inter ests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed-income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds invest, which could
have an adverse impact on each Fund's performance. Such transactions,
particularly in respect of proprietary accounts or customer accounts other than
those included in the Adviser's and its advisory affiliates' asset management
activities, will be execut ed independently of the Funds' transactions and thus
at prices or rates that may be more or less favorable. When the Adviser and its
advisory affiliates seek to purchase or sell the same assets for their managed
accounts, including the Funds, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be peri-
31
<PAGE>
ods, for example, when the Adviser, and/or its affiliates, will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which, or in securities of issuers for which, the Adviser and/or
its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Funds, the Adviser may have access to
certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. The Adviser will not be under any
obligation, however, to effect transactions on behalf of the 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 propri
etary activities or portfolio strategies of Goldman Sachs and its affiliates or
the activities or strategies used for accounts managed by them or other customer
accounts could conflict with the transactions and strategies employed by the
Adviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the 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.
An investment policy committee which may include partners of Goldman Sachs and
its affiliates may develop general policies regarding a Fund's activities, but
will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the Adviser are
also principals or employees of Goldman Sachs or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other
32
<PAGE>
entities may be a consideration of which investors in the Funds
should be aware.
The Adviser may enter into transactions and invest in instruments in which
customers of Goldman Sachs serve as the counterparty, principal or issuer. In
such cases, such party's interests in the transaction will be adverse to the
interests of the Funds, and such party may have no incentive to assure that the
Funds obtain the best possible prices or terms in connection with the
transactions. Goldman Sachs and its affiliates may also create, write or issue
derivative instruments for customers of Goldman Sachs or its affiliates, the
underlying securities currencies or instruments of which may be those in which
the Funds invest or which may be based on the performance of a Fund. The Funds
may, subject to applicable law, purchase investments which are the subject of an
underwriting or other distribution by Goldman Sachs or its affiliates and may
also enter into transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interest of the client. To the extent affiliated transac tions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arm's-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms.
33
<PAGE>
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 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.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: Shearson Lehman, Chase Manhattan, Bear
Stearns Cos., Union Bank of Switzerland, Daiwa Securities America, Inc., Morgan
Stanley, Swiss Bank Corp., Smith Barney Shearson, Salomon Brothers, Inc., and
Bankers Trust. As of December 31, 1996, each Fund held the
34
<PAGE>
following amounts of securities of its regular broker/dealers as defined in Rule
10b-1 under the Investment Company Act, or their parents ($ in thousands); Prime
Obligations Fund - Bear Stearns ($149,014), Swiss Bank Corp. ($52,981), Chase
Manhattan ($246,912), Morgan Stanley & Co., Inc. ($267,039); Government Fund -
Bear Stearns ($50,000), Morgan Stanley & Co. ($138,753), Chase Manhattan
($115,627), Swiss Bank Corp. ($62,531); Treasury Obligations Fund - Swiss Bank
Corp. ($252,384), Bear Stearns ($125,000), Lehman Brothers ($125,000), Union
Bank of Switzerland ($125,000), Chase Manhattan ($466,686), Daiwa Securities
($125,000), Morgan Stanley & Co., Inc. ($560,024), Smith Barney Inc. ($100,000);
and Money Market Fund - Swiss Bank Corp. ($36,494), Chase Manhattan ($102,482),
Morgan Stanley & Co., Inc. ($103,879).
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund, Money
Market Plus 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, Money
Market Plus 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 have 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
35
<PAGE>
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.
The Trustees have 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 they deem 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 Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, 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 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 have 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 determine 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
36
<PAGE>
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 creditors, 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
37
<PAGE>
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.
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 shares 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
38
<PAGE>
the sum to the 365/7 power and subtracting one from the result, according to the
following formula:
<TABLE>
<S> <C>
Effective Yield=[(base period return + 1)/to the power of 365 divided by 7/] - 1.
</TABLE>
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 5.34 5.48 N/A
FST Administration Shares 5.09 5.23 N/A
FST Service Shares 4.84 4.98 N/A
FST Preferred Shares 5.24 5.38 N/A
Money Market Fund:
FST Shares 5.38 5.54 N/A
FST Administration Shares 5.13 5.29 N/A
FST Service Shares 4.88 5.04 N/A
FST Preferred Shares 5.28 5.44 N/A
Treasury Obligations Fund:
FST Shares 5.43 5.56 N/A
FST Administration Shares 5.18 5.31 N/A
FST Service Shares 4.93 5.06 N/A
FST Preferred Shares 5.33 5.42 N/A
Government Fund:
FST Shares 5.36 5.52 N/A
FST Administration Shares 5.11 5.27 N/A
FST Service Shares 4.86 5.02 N/A
FST Preferred Shares 5.26 5.42 N/A
Tax-Free Fund:
FST Shares 3.74 3.81 6.19
FST Administration Shares 3.49 3.56 5.78
FST Service Shares 3.24 3.31 5.36
FST Preferred Shares 3.64 3.71 6.03
</TABLE>
39
<PAGE>
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, 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 5.29 5.43 N/A
FST Administration Shares 5.04 5.18 N/A
FST Service Shares 4.79 4.93 N/A
FST Preferred Shares 5.19 5.33 N/A
Money Market Fund:
FST Shares 5.35 5.49 N/A
FST Administration Shares 5.10 5.24 N/A
FST Service Shares 4.85 4.99 N/A
FST Preferred Shares 5.25 5.39 N/A
Treasury Obligations Fund:
FST Shares 5.36 5.51 N/A
FST Administration Shares 5.11 5.26 N/A
FST Service Shares 4.86 5.01 N/A
FST Preferred Shares 5.26 5.41 N/A
Government Fund:
FST Shares 5.31 5.45 N/A
FST Administration Shares 5.06 5.20 N/A
FST Service Shares 4.81 4.95 N/A
FST Preferred Shares 5.21 5.35 N/A
Tax-Free Fund:
FST Shares 3.70 3.76 6.13
FST Administration Shares 3.45 3.51 5.71
FST Service Shares 3.20 3.26 5.30
FST Preferred Shares 3.60 3.66 5.96
</TABLE>
40
<PAGE>
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 (but not limited to) Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Morningstar Mutual Funds, Micropol, 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 (without limitation): inflation and interest
rates, certificates of deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts and repurchase agreements. The Trust may
also compare a Fund's performance with that of other mutual funds with similar
investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Fund's portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Fund's performance data will be based on historical results and is not
intended to indicate future performance. A Fund's performance will vary based
on market conditions, portfolio expenses, portfolio investments and other
factors. Return for a Fund will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield of return.
The Trust may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request. The Trust may from time to time
summarize the substance of discussions contained in shareholder reports in
advertisements and publish the Adviser's views as to markets, the rationale for
a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to shareholders.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or
41
<PAGE>
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 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 gross income for the taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock, securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the 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 not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total (gross) assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the 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
42
<PAGE>
and other 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 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. Dividends paid by a Fund from the
excess of net long-term capital gain (if any) 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. At December 31, 1996, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Tax Free Money Market Fund $13,000 2004
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
43
<PAGE>
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. 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, or earns other taxable
income any distributions of income from such investments or other taxable income
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 or eliminated 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 may
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the
44
<PAGE>
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 and with certain certifications required by the Internal
Revenue Service or if the Internal 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
applicable 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, if applicable, or that the investor is an
exempt recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in 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.
Redemptions (including exchanges) and other dispositions of Fund shares in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Funds successfully maintain a
constant net asset value per share. Shareholers should consult their own tax
advisers with reference to their particular circumstances to determine whether a
redemption, exchange or other disposition of Fund shares is properly treated as
a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder who is required to file a
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
45
<PAGE>
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.
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. 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 and, if a current IRS Form W-8 or acceptable substitute is not on
file with the Fund, may be subject to backup witholding on certain payments.
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 a Fund 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, intangible property 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 intangible property 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.
46
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Funds were reorganized from series of a Massachusetts business trust as
part of Goldman Sachs Trust, a Delaware business trust, under a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares exists, each
class or series must be preferred over all other classes or series in respect of
assets specifically allo cated 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 Statement of Addition al Information,
the Trustees have 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 a 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 custom ers, 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, maintaining 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 mainte nance 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 0.50% of the
average daily net assets of such shares.
It is possible that an institution or its affiliates may offer different classes
of shares (i.e., FST Shares, FST Administration
47
<PAGE>
Shares, FST Service Shares or FST Preferred Shares) to its customers and thus
receive different compensation with respect to different classes of shares of
each 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 notice to shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transfer able and have no preemptive subscription or conversion rights.
As of the date of this Statement of Additional Information, no shares of
Municipal Fund and Plus Fund were outstanding.
As of April 1, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Prime Obligations Fund: Commerce Bank of
Kansas City, PO Box 248, Kansas City, MO 64141 (12.02%), Citicorp Trust NA as
Custodian, 400 Royal Palm Way, Palm Beach, FL 33480 (7.38%) and University of
Texas Systems, 201 W. 7th Street, Austin, TX (11.58%). As of April 1, 1997, the
entities noted below may have owned beneficially 5% or more of the outstanding
shares of Money Market Fund: Loral Corporation, 600 Third Avenue, New York, NY
10016 (9.13%), Chicago Trust Company, 171 N. Clark Street, #5CA, Chicago, IL
60601-3203(7.87%) and Citicorp Trust NA as Custodian, 400 Royal Palm Way, Palm
Beach, FL 33480 (6.50%). As of April 1, 1997, the entities noted below may have
owned beneficially 5% or more of the outstanding shares of Treasury Obligations
Fund: Commerce Bank of Kansas City, NA, PO Box 248, Kansas City, MO 64141
(11.34%), Associated Bank, P.O. Box 1007, Neehah, WI (7.98%), Amalgamated Bank
of Chicago, One West Monroe Street, Chicago, IL 60603 (6.31%), and Fulton Bank,
P.O. Box 3215, Lancaster, PA 17604 (5.52%). As of April 1, 1997, the entities
noted below may have owned beneficially 5% or more of the outstanding shares of
Government Fund: Chicago Trust Company, 171 N. Clark St., Chicago, IL 60601
(21.46%), Mellon Bank, Three Mellon Bank Center, Pittsburgh, PA 15258 (5.64%)
and Texas State Treasury, P.O. Box 12608, Austin, TX 78711 (10.35%). As of
April 1, 1997, the entities noted below may have owned beneficially 5% or more
of the outstanding shares of Tax-Free Fund: Mercantile Bank of St. Louis, N.A.,
Mandell & Company, P.O. Box 387 MPO, St. Louis, MO 63101 (10.48%), Hilliard
Lyons Trust Co., P.O. Box 32760,
48
<PAGE>
Louisville, KY 40232 (6.22%), Commerce Bank of Kansas City, P.O. Box 248, Kansas
City, MO 64141 (16.78%) and Summit Bank, P.O. Box 821, Hackensack, NJ 07602
(8.73%). As of April 1, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Federal Fund: Burlington
Bank & Trust, MATCO, P.O. Box 728, Burlington, IA 52601 (5.48%), Central
Carolina Bank & Trust Co., P.O. Box 931, Durham, NC 27702 (9.75%), Commerce Bank
NA, LENEXA, P.O. Box 419248, Kansas City, MO 64141 (5.64%), Commerce Bank of
Kansas City, P.O. Box 419248, BB4-1, Kansas City, MO 64141 (19.69%), First
National Bank of Southwestern Ohio, P.O. Box 476, Hamilton, OH 45012 (16.40%),
Mercantile Bank of St. Louis, N.A., Mandell & Company, P.O. Box 387 MPO, St.
Louis, MO 63101 (14.13%), United National Bank-NJ, Hubbell & Co., 202 Park
Avenue, Plainfield, NJ 07060 (6.28%). As of April 1, 1997, the entities noted
below may have owned beneficially 5% or more of the outstanding shares of
Treasury Instruments Fund: Central Bank & Trust Co., CEBANTCO, P.O. Box 1360,
Lexington, KY 40590 (10.48%), Chicago Trust Company, 171 N. Clark Street, #5CA,
Chicago, IL 60601 (5.06%), Harris Trust & Savings Bank, 200 W. Monroe Street,
Fl. 12, Chicago, IL 60606 (40.64%), Northern Capital Trust of Fargo, P.O. Box
829, Fargo, ND 58102 (16.70%), William Harris Investors, Inc., 2 N. LaSalle
Street, Ste. 400, Chicago, IL 60602 (22.01%).
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
The Trust is not required to hold annual meetings of shareholders and does not
intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees,
either to one vote for each share or to one vote for each dollar of net asset
value represented by such shares on all matters presented to shareholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote
separately from each other. Shareholders of the Trust do not have cumulative
voting rights in the election of Trustees. Meetings of shareholders of the
Trust, or any series or class thereof, may be called by the Trustees, certain
officers or upon the written request of holders of 10% or more of the shares
entitled to vote
49
<PAGE>
at such meetings. The shareholders of the Trust will have voting rights only
with respect to the limited number of matters specified in the Declaration of
Trust and such other matters as the Trustees may determine or may be required by
law.
The Declaration of Trust provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust acting on behalf of any
affected series, must, upon request by such shareholder, assume the defense of
any claim made against such shareholder for any act or obligation of the series
and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust
without a shareholder vote. However, shareholders of the Trust have the right
to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
50
<PAGE>
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or
classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Delaware law, the shareholders of the Funds are not gener ally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in 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 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 provides for indemnification by the relevant
Fund for all loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of 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 any judgment thereon. In view of the above,
the risk of personal liability of shareholders is remote.
In addition to the requirements under the Declaration of Trust, the Trust
provides that shareholders 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 Delaware law who hold at least 10% of the outstand
ing shares of the Fund, or 10% of the outstanding shares of the 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 and to employ
other advisers in considering the merit of the request and shall require an
undertaking by the shareholders making such request to reimburse the Fund for
the expense of any such advisers in the event that the Trustees determine not to
bring such action.
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<PAGE>
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the 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
Arthur Andersen LLP, 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, Arthur Andersen LLP 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, 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.
52
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Financial Square
Funds
- -------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Fund
Money Market Fund
Treasury Obligations Fund
Government Fund
Tax-Free Money Market Fund
- -------------
Goldman
Sachs
- -------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome this opportunity to provide you with a summary of the trends
and key events that affected the economy and the Goldman Sachs Money Market
Trust/Financial Square Funds in 1996. It was another strong year for the Funds,
during which all of the portfolios outperformed their respective IBC Financial
Data, Inc. averages during the period. Assets in the Financial Square Funds
totaled $12.2 billion as of December 31, 1996, up 34% from last year.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation.
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) at 2.0% annualized. Growth was more dramatic during
the second quarter, as industrial activity and automobile and home sales all
showed significant improvement, pushing real GDP to 4.7%, its highest rate in
two years. That growth caused some to expect the Fed to change direction and
tighten before year-end. However, the economy subsequently moderated
significantly, with third-quarter annualized real GDP retreating to 2.1%,
reflecting lackluster consumer spending and a widening U.S. trade deficit. As
1996 drew to a close, moderate economic growth and contained inflation kept the
Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
Funds' weighted average maturities and structures were equally important to our
strategy.
During the second and third quarters of 1996, we extended the Financial
Square Funds' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Funds closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for Financial Square Funds Institutional Shares* as of 12/31/96
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Weighted
SEC 7-Day SEC 7-Day 30-Day Average
Financial Square Current Effective Average Maturity
Funds Yield Yield Yield (days)
=====================================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.34% 5.48% 5.31% 41
- --------------------------------------------------------------------
Money Market 5.38% 5.54% 5.34% 37
- --------------------------------------------------------------------
Treasury
Obligations 5.43% 5.56% 5.29% 33
- --------------------------------------------------------------------
Government 5.36% 5.52% 5.30% 36
- --------------------------------------------------------------------
Tax-Free
Money Market 3.74% 3.81% 3.42% 34
- --------------------------------------------------------------------
</TABLE>
* Financial Square Funds offer four separate classes of shares (Institutional,
Preferred, Administration and Service), each of which is subject to different
fees and expenses that affect performance and entitle shareholders to different
services. The Preferred, Administration and Service shares offer financial
institutions the opportunity to receive a fee for providing administrative
support services. The Preferred shares pay 0.10%, Administration shares pay
0.25%, and the Service shares pay 0.50%. More complete information, including
management fees and expenses, is included in the Funds' prospectus or may be
obtained by calling Goldman Sachs Funds at 1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy Economy and a Strong
Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from the Orange County bankruptcy abated somewhat,
although various forms of credit enhancement remained popular, even among high-
quality issuers. Reflecting the strong national economy, many states and
localities experienced positive financial results, reducing their regular cash
flow borrowings.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Credit Picture Abroad: Europe Improved, While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks.
In Asia, creditworthiness was fairly stable. The notable negative
exception was the Japanese financial sector, which remained under pressure from
the ongoing weakness of the real estate markets, sluggish economic growth and
ongoing deregulation. However, Japan's largest banks have strong fundamentals
and will continue to be important and dominant players in the global financial
market. Australian credit quality strengthened through improved macroeconomic
balances, which provided evidence that Australia's recent boom-and-bust cycles
may be over. The weakness of Asian exports did not affect creditworthiness
directly; exports should recover this year, and the scare could prompt salutary
policy adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market Funds. The Goldman Sachs Credit Department, which has analysts based in
London, Tokyo, Frankfurt and New York, as well as extensive technological assets
and credit expertise, will continue to vigilantly monitor global developments.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, the Financial Square Funds will continue to be managed with
short-to-neutral average life targets and short, laddered structures to prepare
for the probability of higher rates ahead.
Extended Trading Hours Improve Service Further
To meet the needs of many institutional investors who receive inflows of
cash late in the day, we extended the trading hours for both purchases and
redemptions in the Financial Square Treasury Obligations Fund until 5:00 p.m.
EST. (The Financial Square Government Fund also provides late-day service.) We
have found many of our clients enjoy the added flexibility of late-day trading
and are increasing their use of this beneficial service.
In closing, we thank you for your support and for making 1996 a successful
year for the Financial Square Funds. We are pleased that many of you have joined
our conference calls following each Federal Open Market Committee meeting
throughout the year. Our goal is to continue to provide you with competitive
performance, as well as a range of value-added services that reflect the breadth
and depth of Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
- ---------------------
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations--53.0%
Bank Holding Companies
BankAmerica Corp.
$150,000,000 5.27% 03/21/97 $ 148,265,292
Chase Manhattan Corp.
100,000,000 5.28 03/14/97 98,944,000
JP Morgan & Co., Inc.
25,000,000 5.73 05/30/97 24,407,104
NationsBank Corp.
50,000,000 5.40 05/09/97 49,040,000
Business Credit Institutions
General Electric Capital Corp.
50,000,000 5.30 03/26/97 49,381,667
100,000,000 5.44 04/03/97 98,609,778
JC Penney Funding Corp.
50,000,000 5.31 01/31/97 49,778,750
Commercial Banks
CP Trust Certificates Series 1996
85,000,000 5.68/(a)/ 03/28/97 85,000,000
Financial Services
National Rural Utilities Cooperative
34,250,000 5.30 02/11/97 34,043,263
62,000,000 5.28 02/21/97 61,536,240
Life Insurance
Commonwealth Life Insurance Co.
20,000,000 5.64/(b)/ 05/08/97 20,000,000
Pacific Mutual Life Insurance Co.
50,000,000 5.52/(b)/ 02/28/97 50,000,000
Prudential Funding Corp.
50,000,000 6.50 01/02/97 49,990,972
50,000,000 5.43 02/28/97 49,562,583
Motor Vehicles and Equipment
Ford Motor Credit Co.
150,000,000 5.31 02/04/97 149,247,750
Personal Credit Institutions
Associates Corp. of North America
50,000,000 6.30 01/02/97 49,991,250
50,000,000 5.32 01/30/97 49,785,722
50,000,000 5.32 01/31/97 49,778,333
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
10,000,000 5.52 01/28/97 9,958,600
50,000,000 5.43 02/28/97 49,562,584
21,000,000 5.29 03/13/97 20,780,906
31,308,000 5.29 03/14/97 30,976,761
USAA Capital Corp.
30,000,000 5.34 04/07/97 29,572,800
Receivable/Asset Financings
Beta Finance Inc.
16,000,000 5.58 01/27/97 15,935,520
24,000,000 5.58 02/03/97 23,877,240
15,000,000 5.50 02/04/97 14,922,083
19,000,000 5.35 04/07/97 18,728,933
25,000,000 6.11 06/17/97 25,000,000
Delaware Funding Corp.
30,832,000 5.29 02/20/97 30,605,470
Enterprise Funding Corp.
50,000,000 5.33 01/23/97 49,837,139
International Lease Finance Corp.
60,000,000 5.30 03/17/97 59,337,500
20,000,000 5.29 03/24/97 19,759,011
New Center Asset Trust
25,000,000 5.52 01/28/97 24,896,500
25,000,000 5.37 04/04/97 24,653,188
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
100,000,000 5.30 02/13/97 99,366,945
50,000,000 5.30 02/18/97 49,646,667
C.S. First Boston, Inc.
60,000,000 5.33 01/22/97 59,813,450
Merrill Lynch & Co., Inc.
50,000,000 5.35 02/11/97 49,695,347
25,000,000 5.45 02/19/97 24,814,549
75,000,000 5.33 02/26/97 74,378,167
Morgan Stanley Group, Inc.
40,000,000 5.59 01/28/97 39,832,300
50,000,000 5.41 02/03/97 49,752,042
20,000,000 5.32 02/06/97 19,893,600
40,000,000 5.53 06/27/97 40,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations (continued)
Telecommunications
Ameritech Corp.
$ 70,000,000 5.34% 04/07/97 $ 69,003,200
Tobacco
Philip Morris Co.
70,000,000 6.50 01/02/97 69,987,361
- -------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $2,311,433,345
- -------------------------------------------------------------------
Bank Notes--15.6%
Dakota Certificates of Standard Credit Card Master Trust
$ 50,000,000 5.33%(b) 02/07/97 $ 49,726,097
FCC National Bank
40,000,000 5.70 05/22/97 39,953,925
75,000,000 6.00 06/02/97 75,003,030
First Bank FSB
50,000,000 5.62(b) 02/11/97 50,000,000
20,000,000 5.61(b) 04/11/97 19,998,937
First National Bank of Maryland
20,000,000 5.60(b) 09/30/97 19,994,187
Harris Trust & Savings Bank
16,500,000 6.04 06/17/97 16,520,097
Household Bank FSB
50,000,000 5.63(b) 09/23/97 49,997,602
Huntington National Bank
35,000,000 6.05 06/13/97 35,042,420
PNC Bank, N.A.
58,500,000 5.58(b) 04/01/97 58,488,742
100,000,000 5.40(b) 10/01/97 99,941,219
Society National Bank of Cleveland
100,000,000 5.58 05/14/97 99,961,237
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54(b) 05/15/97 24,995,313
- -------------------------------------------------------------------
Total Bank Notes $ 679,622,806
- -------------------------------------------------------------------
U.S. Government Agency Obligations--7.1%
Federal Farm Credit Bank
32,000,000 5.39 02/24/97 31,741,280
Federal Home Loan Mortgage Corp.
50,000,000 5.40 02/24/97 49,595,000
Federal National Mortgage Association
$200,000,000 5.36% 03/04/97 $ 198,153,778
30,000,000 5.35 03/17/97 29,665,625
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 309,155,683
- -------------------------------------------------------------------
Certificates of Deposit--6.9%
Chase Manhattan Corp.
$ 25,000,000 5.75% 02/03/97 $ 25,000,000
25,000,000 5.42 03/12/97 25,000,000
Mellon Bank, N.A.
50,000,000 5.35 02/19/97 50,000,000
100,000,000 5.50 04/07/97 100,000,000
Morgan Guaranty Trust Co.
50,000,000 5.65 02/03/97 50,000,445
Union Bank of California
50,000,000 5.58 02/28/97 50,000,000
- -------------------------------------------------------------------
Total Certificates of Deposit $ 300,000,445
- -------------------------------------------------------------------
Repurchase Agreements--17.7%
C.S. First Boston Corp., dated 12/31/96, repurchase price
$302,790,000 (FNMA: $308,478,596, 6.00%-6.18%, 02/01/09-04/01/34)
$300,000,000 5.40% 03/03/97 $ 300,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $102,538,618, 5.47%, 12/30/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$75,641,250 (FNMA: $78,669,875, 7.50%, 04/01/26)
75,000,000 5.40 02/26/97 75,000,000
Joint Repurchase Agreement Account
297,900,000 6.58 01/02/97 297,900,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 772,900,000
- -------------------------------------------------------------------
Total Investments $4,373,112,279/(c)/
===================================================================
/(a)/Variable rate security - base index is either U.S. Treasury
Bill, one or three month LIBOR, one month commercial paper,
Federal Funds or Prime lending rate
/(b)/Variable rate master note-base index is Federal Funds.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices. The percentages shown for each
investment category reflect the value of investments in that
category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Money Market Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Commercial Paper and Corporate Obligations--45.7%
Commercial Banks
CP Trust Certificates Series 1996
$ 60,000,000 5.68%\(a)\ 03/28/97 $ 60,000,000
Computer Software and Services
First Data Corp.
20,000,000 5.40 02/19/97 19,853,000
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
ABN Amro N.A.
50,000,000 5.45 02/28/97 49,560,972
Banca Crt Financial Corp.
15,000,000 5.35 01/31/97 14,933,125
22,945,000 5.42 04/01/97 22,634,095
20,000,000 5.47 04/03/97 19,720,422
13,000,000 5.42 04/08/97 12,810,149
BBL North America
125,000,000 6.90 01/02/97 124,976,042
Bex America, Inc.
36,000,000 5.36 01/21/97 35,892,900
Generale Bank
70,000,000 5.35 04/10/97 68,970,125
Nordbanken, N.A.
42,559,000 6.50 01/10/97 42,489,842
Royal Bank of Canada
100,000,000 6.50 01/02/97 99,981,944
San Paolo U.S. Finance Corp.
25,000,000 5.36 01/31/97 24,888,333
Swedbank, Inc.
100,000,000 5.47 02/04/97 99,483,389
Unifunding, Inc.
60,000,000 5.45 01/29/97 59,745,667
50,000,000 5.36 04/07/97 49,285,333
Life Insurance
Sunamerica Life Insurance Co.
50,000,000 5.50\(b)\ 09/02/97 50,000,000
Mortgage Brokers
Countrywide Funding Corp.
28,700,000 5.35 01/23/97 28,606,167
27,000,000 5.35 01/28/97 26,891,663
Countrywide Home Loans
50,000,000 6.65 01/02/97 49,990,764
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
16,312,000 5.57% 01/14/97 16,279,190
30,000,000 5.60 01/16/97 29,930,000
10,000,000 5.35 03/25/97 9,876,653
55,000,000 5.35 03/26/97 54,313,417
General Motors Acceptance Corp.
20,000,000 5.57 02/04/97 19,894,789
50,000,000 5.47 04/07/97 49,270,667
Security and Commodity Brokers, Dealers and Services
Merrill Lynch & Co., Inc.
25,000,000 5.35 02/11/97 24,847,674
25,000,000 5.45 02/19/97 24,814,549
50,000,000 5.33 02/26/97 49,585,444
Morgan Stanley Group, Inc.
22,900,000 5.53\(a)\ 06/27/97 22,900,000
Nomura Holdings
15,000,000 5.39 01/28/97 14,939,363
50,000,000 5.39 01/30/97 49,782,903
- --------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $1,351,989,720
- --------------------------------------------------------------------
Bank Notes--15.1%
Dakota Certificates of Standard Credit Card Master Trust
$ 25,000,000 5.33%\(b)\ 02/07/97 $ 24,863,049
FCC National Bank
25,000,000 5.70 05/22/97 24,971,203
50,000,000 6.00 06/02/97 50,002,020
First Bank FSB
75,000,000 5.61\(b)\ 04/11/97 74,996,012
First National Bank of Maryland
30,000,000 5.61\(b)\ 09/26/97 29,991,409
25,000,000 5.60\(b)\ 09/30/97 24,992,734
Household Bank FSB
25,000,000 5.63\(b)\ 09/23/97 24,998,185
Huntington National Bank
10,000,000 6.05 06/13/97 9,996,458
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Money Market Fund (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Bank Notes (continued)
PNC Bank, N.A.
$ 42,000,000 5.46%(b) 09/03/97 $ 41,977,353
50,000,000 5.40(b) 10/01/97 49,970,608
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
50,000,000 5.45(b) 07/11/97 49,983,901
- --------------------------------------------------------------------
Total Bank Notes $ 446,742,932
- --------------------------------------------------------------------
Certificates of Deposit--1.2%
Chase Manhattan Corp.
$ 35,000,000 5.75% 02/03/97 $ 35,000,000
- --------------------------------------------------------------------
Total Certificates of Deposit $ 35,000,000
- --------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$125,000,000 5.49% 03/18/97 $ 125,002,592
Sanwa Bank Ltd., London
100,000,000 5.46 03/21/97 100,001,079
- --------------------------------------------------------------------
Total Certificates of Deposit - Foreign Eurodollar $ 225,003,671
- --------------------------------------------------------------------
Certificates of Deposit - Yankeedollar--12.3%
Fuji Bank, Chicago
$100,000,000 5.52% 01/17/97 $ 100,000,441
Industrial Bank of Japan, New York
100,000,000 5.46 03/19/97 100,001,051
Landesbank Hessen Thuer Gir, New York
50,000,000 6.03 06/13/97 50,060,885
Sumitomo Bank, Los Angeles
75,000,000 5.52 02/28/97 74,994,514
Westpac Banking Corp., New York
40,000,000 5.97 06/06/97 40,027,198
- --------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 365,084,089
- --------------------------------------------------------------------
Time Deposit--2.9%
Bank of Tokyo, Mitsubishi Bank Ltd., London
$ 85,000,000 5.50% 05/16/97 $ 85,000,000
- --------------------------------------------------------------------
Total Time Deposit $ 85,000,000
- --------------------------------------------------------------------
Repurchase Agreements--15.4%
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $69,839,000, 5.47%, 12/30/97; FHLMC:
$32,517,875, 7.26%, 09/17/01)
$100,000,000 6.50% 01/02/97 $ 100,000,000
SBC Government Securities, Inc., dated 12/31/96, repurchase price
$150,052,083 (FNMA Stripped Securities: $149,437,500, 01/23/97;
FNMA: $3,650,246, 6.50%, 08/15/97)
150,000,000 6.25 01/02/97 150,000,000
Joint Repurchase Agreement Account
205,200,000 6.58 01/02/97 205,200,000
- --------------------------------------------------------------------
Total Repurchase Agreements $ 455,200,000
- --------------------------------------------------------------------
Total Investments $2,964,020,412(c)
================================================================================
(a) Variable rate security - base index is either U.S. Treasury Bill, one or
three month LIBOR, one month commercial paper, Federal Funds or Prime
lending rate
(b) Variable rate master note-base index is Federal Funds.
(c) The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Treasury Obligations Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
=====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Notes
$ 100,000,000 5.63% 06/30/97 $ 99,831,980
30,000,000 6.00 09/02/97 29,991,342
92,500,000 5.38 12/01/97 92,370,356
40,000,000 5.25 12/31/97 39,901,534
- --------------------------------------------------------------------
Total U.S. Treasury Obligations $ 262,095,212
====================================================================
Repurchase Agreements--91.9%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$125,046,875 (U.S. Treasury Notes: $127,384,047, 5.75%-5.88%,
10/31/98-12/31/98)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$101,332,500 (U.S. Treasury Note: $102,491,792, 5.50%,
11/15/98)
100,000,000 5.33 03/13/97 100,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase price
$125,046,528 (U.S. Treasury Bond: $71,136,658, 8.50%,
02/15/20; U.S. Treasury Note: $56,365,266, 7.25%, 08/15/04)
125,000,000 6.70 01/02/97 125,000,000
Daiwa Securities, dated 12/31/96, repurchase price $125,047,917
(U.S. Treasury Bill: $127,500,528, 11/13/97)
125,000,000 6.90 01/02/97 125,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Bill: $127,500,296, 12/11/97)
125,000,000 6.60 01/02/97 125,000,000
JP Morgan Securities, dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Notes: $127,371,815, 6.88%-7.75%,
12/31/99-11/15/01)
125,000,000 6.60 01/02/97 125,000,000
Lehman Government Securities, Inc., dated 12/31/96, repurchase
price $125,049,306 (U.S. Treasury Stripped Securities:
$127,500,543, 02/15/97-11/15/03)
125,000,000 7.10 01/02/97 125,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $125,044,792 (U.S. Treasury Bills:
$70,594,041, 01/09/97-01/30/97; U.S. Treasury Stripped
Securities: $14,626,460, 08/15/98-11/15/99; U.S. Treasury
Notes: $42,283,899, 7.50%-9.25%, 05/15/97-11/15/01)
125,000,000 6.45 01/02/97 125,000,000
Nomura Securities International, Inc., dated 12/12/96, repurchase
price $101,335,000 ( U.S. Treasury Bill: $9,629,890, 09/18/97;
U.S. Treasury Notes: $92,371,056, 5.00%-8.13%, 05/31/97-05/31/01)
100,000,000 5.34 03/12/97 100,000,000
Repurchase Agreements (continued)
Sanwa Securities, dated 12/31/96, repurchase price $125,046,875
(U.S. Treasury Notes: $85,107,798, 4.75%-5.25%,
08/31/98-04/30/01; U.S. Treasury Bill: $40,971,000, 10/16/97)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
Smith Barney, Inc., dated 12/11/96, repurchase price $101,335,000
(U.S. Treasury Bill: $1,475,971, 03/13/97; U.S. Treasury
Stripped Security: $ 15,052,048, 02/15/98; U.S. Treasury
Notes: $85,472,470, 4.75%-7.88%, 02/15/97-04/15/98)
100,000,000 5.34 03/11/97 100,000,000
UBS Securities, Inc., dated 12/31/96, repurchase price
$125,047,743 (U.S. Treasury Notes: $127,294,387, 6.13%-7.75%,
05/31/97-11/15/01)
125,000,000 6.88 01/02/97 125,000,000
Joint Repurchase Agreement Account
1,419,100,000 6.58 01/02/97 1,419,100,000
- --------------------------------------------------------------------
Total Repurchase Agreements $2,844,100,000
====================================================================
Total Investments $3,106,195,212/(a)/
====================================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflects the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Government Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
U.S. Government Agency Obligations--44.7%
Federal Home Loan Bank
$ 35,000,000 5.40%(a) 04/04/97 $ 34,991,708
15,000,000 5.45 11/12/97 14,986,333
20,000,000 5.42 12/02/97 19,973,237
50,000,000 5.50(a) 12/26/97 49,959,182
Federal National Mortgage Association
72,000,000 5.35 01/21/97 71,786,000
25,000,000 5.35 01/24/97 24,914,549
20,000,000 5.27(a) 04/04/97 19,985,729
75,000,000 4.75(a) 04/21/97 74,974,867
100,000,000 5.43(a) 09/12/97 99,940,710
50,000,000 5.41(a) 09/29/97 49,981,540
12,500,000 5.53 10/29/97 12,495,125
75,000,000 5.40(a) 12/03/97 74,952,900
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 548,941,880
- -------------------------------------------------------------------
U.S. Treasury Obligations--6.5%
United States Treasury Notes
$ 50,000,000 5.63% 06/30/97 $ 49,915,080
30,000,000 6.00 09/02/97 29,990,027
- -------------------------------------------------------------------
Total U.S. Treasury Obligations $ 79,905,107
- -------------------------------------------------------------------
Repurchase Agreements--49.0%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$50,018,889 (FNMA: $51,422,558, 7.00%, 12/01/11-04/01/24)
$ 50,000,000 6.80% 01/02/97 $ 50,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase price
$50,671,875 (FHLMC: $52,596,865, 7.00%, 11/01/26)
50,000,000 5.38 03/11/97 50,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$50,671,875 (FNMA: $51,607,046, 6.12%, 10/01/32)
50,000,000 5.38 03/11/97 50,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase price
$50,671,875 (FNMA: $52,512,714, 7.50%, 06/01/26)
50,000,000 5.38 03/12/97 50,000,000
Nomura Securities International, Inc., dated 12/31/96, repurchase
price $50,020,833 (FNMA: $34,860,373, 6.50%, 07/01/24; FHLMC:
$16,396,948, 7.00%-8.00%, 12/01/22-12/01/26)
50,000,000 7.50 01/02/97 50,000,000
Joint Repurchase Agreement Account
351,600,000 6.58 01/02/97 351,600,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 601,600,000
- -------------------------------------------------------------------
Total Investments $1,230,446,987/(b)/
===================================================================
/(a)/Variable rate security-base index is either Federal Funds, Prime
lending rate or one month LIBOR.
/(b)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices.
The percentages shown for each investment category reflect the value
of investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Alabama--4.8%
Columbia IDB PCRB for Alabama Power Co. Series 1995 (A-1/VMIG1)
$ 1,500,000 5.00% 01/01/97 $ 1,500,000
Jefferson County MF Hsg. Refunding RB for Hickory Knolls Project
Series 1994 (Amsouth Bank LOC)(P-1)
4,040,000 4.25 01/07/97 4,040,000
Jefferson County Sewer Revenue Warrants Series 1995 A (Bayerische
Landesbank Girozentrale LOC)(A-1+/VMIG1)
18,200,000 4.25 01/07/97 18,200,000
Parrish IDB PCRB for Alabama Power Co. Series 1994 A(A-1+/VMIG1)
2,150,000 5.00 01/01/97 2,150,000
- -------------------------------------------------------------------
$25,890,000
- -------------------------------------------------------------------
Arizona--1.4%
Maricopa County PCRB for Southern California Edison Co.
Series 1985 C(A-1/P-1)
$ 6,450,000 3.60% 03/12/97 $ 6,450,000
Phoenix IDA MF Hsg. VRDN for Del Mar Terrace Apartments (Bank of
America LOC)(MIG1)
1,300,000 4.15 01/07/97 1,300,000
- -------------------------------------------------------------------
$ 7,750,000
- -------------------------------------------------------------------
Arkansas--0.8%
Crossett City PCRB for Georgia Pacific Corp. Series 1991(Suntrust
Bank LOC)(A-1/P-1)
$ 4,500,000 4.15% 01/07/97 $ 4,500,000
- -------------------------------------------------------------------
California--5.0%
California RANS Index Series 1996-97 B(SP-1+/MIG1)
$16,000,000 3.47% 01/31/97 $16,000,000
California RANS VRDN Series 1996-97(SP-1+/VMIG1)
4,300,000 4.00 01/07/97 4,300,000
California School Cash Reserve Program Authority Series 1996
(MBIA)(MIG1)
4,500,000 4.50 12/19/97 4,537,690
Los Angeles County TRANS Series 1996-97 A(Credit Suisse/Morgan
Guaranty/Westdeutsche Landesbank Girozentrale/Bank of America/
Union Bank of Switzerland LOC)(SP-1/MIG1)
2,080,000 4.50 01/07/97 2,087,107
- -------------------------------------------------------------------
$26,924,797
- -------------------------------------------------------------------
Colorado--1.0%
Colorado Health Facilities Authority Series 1992 C(A-1+/VMIG1)
$ 5,500,000 4.15% 01/07/97 $ 5,500,000
- -------------------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES Series 1988 C (Bayerische
Landesbank Girozentrale LOC)(A-1/VMIG1)
$ 6,100,000 4.10% 01/07/97 $ 6,100,000
- -------------------------------------------------------------------
Florida--4.6%
Dade County Water & Sewer RB Series 1994 (FGIC)(A-1/VMIG1)
$ 3,700,000 4.00% 01/07/97 $ 3,700,000
Florida Local Government Pooled CP Notes (First Union National
Bank of Florida LOC)(A-1/P-1)
11,617,735 3.70 01/30/97 11,617,735
Jacksonville PCRB for Florida Power & Light Co. Series 1995
(A-1+/VMIG1)
600,000 5.25 01/01/97 600,000
Putnam County Development Authority for Seminole Electric Series
1984 H VRDN (CFC)(A-1+/P-1)
9,100,000 4.15 01/07/97 9,100,000
- -------------------------------------------------------------------
$25,017,735
- -------------------------------------------------------------------
Georgia--6.8%
Bartow County PCRB for Georgia Power Co. Series 1996(VMIG1)
$ 5,800,000 5.25% 01/01/97 $ 5,800,000
Burke County PCRB for Georgia Power Co. Second Series 1995
(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
Burke County PCRB for Georgia Power Co. Series 1994(VMIG1)
3,800,000 5.00 01/01/97 3,800,000
Burke County PCRB for Georgia Power Co. Series 1995(A+/VMIG1)
3,400,000 5.00 01/01/97 3,400,000
6,300,000 5.25 01/01/97 6,300,000
Floyd County PCRB for Georgia Power Co. Series 1996(A-1/VMIG1)
3,000,000 5.00 01/01/97 3,000,000
Monroe County Development Authority for Georgia Power Scherer
Project Series 1995(A-1/VMIG1)
3,300,000 5.00 01/01/97 3,300,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series 1985 B(Credit Suisse/Morgan
Guaranty/Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
4,575,000 3.55 03/06/97 4,575,000
6,000,000 3.55 04/10/97 6,000,000
- -------------------------------------------------------------------
$36,975,000
- -------------------------------------------------------------------
Hawaii--0.7%
Hawaii Housing Finance and Development Authority MF Hsg.VRDN
Series 1985 A(FHLB LOC)(A-1+)
$ 4,000,000 3.00% 01/07/97 $ 4,000,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Illinois--8.3%
Illinois Health Facilities Authority VRDN for Elmhurst Memorial
Hospital Series 1993 B(VMIG1)
$ 8,900,000 5.30% 01/01/97 $ 8,900,000
Illinois Health Facilities Authority VRDN for Evangelical
Hospitals Corp. Series 1985 A (First National Bank of Chicago
LOC)(VMIG1)
2,600,000 4.10 01/07/97 2,600,000
Illinois Health Facilities Authority VRDN for Healthcorp
Affiliates Projects Series 1985 A (Northern Trust Company
LOC)(VMIG1)
2,700,000 4.15 01/07/97 2,700,000
Illinois Health Facilities Authority VRDN RB for Northwest
Community Hospital Series 1995 (A-1+/VMIG1)
5,000,000 4.20 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for Resurrection
Healthcare(VMIG1)
6,000,000 5.00 01/01/97 6,000,000
Illinois Health Facilities Authority VRDN Series 1985 C and D
Revolving Fund Pooled Finance Program (First National Bank of
Chicago LOC)(A-1/VMIG1)
16,700,000 4.15 01/07/97 16,700,000
Sauget PCRB VRDN for Monsanto Series 1992(P-1)
1,000,000 4.20 01/07/97 1,000,000
Sauget PCRB VRDN for Monsanto Series 1993(P-1)
1,900,000 4.20 01/07/97 1,900,000
- -------------------------------------------------------------------
$44,800,000
- -------------------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN for Parkview Memorial Hospital
Series 1985 B (Bank of America LOC)(VMIG1)
$ 8,100,000 4.15% 01/07/97 $ 8,100,000
Indiana Hospital Equipment Financing Authority VRDN Series 1985 A
(MBIA)(A-1/VMIG1)
2,500,000 4.20 01/07/97 2,500,000
Jasper County PCRB for Nipsco Series 1994 A and C(A-1+/VMIG1)
9,300,000 5.10 01/01/97 9,300,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
7,475,000 4.15% 01/07/97 7,475,000
- -------------------------------------------------------------------
$27,375,000
- -------------------------------------------------------------------
Iowa--2.0%
Chillicothe PCRB for Midwest Power Systems Series 1993 A
(A-1/VMIG1)
$ 3,700,000 4.15% 01/07/97 $ 3,700,000
Muscatine County VRDN for Monsanto Corp. Series 1992(P-1)
7,200,000 4.20 01/07/97 7,200,000
- -------------------------------------------------------------------
$10,900,000
- -------------------------------------------------------------------
Kentucky--0.6%
Calvert PCRB for Air Products and Chemicals, Inc. Project Series
1993 A(A-1)
$ 3,000,000 4.20% 01/07/97 $ 3,000,000
- -------------------------------------------------------------------
Maryland--2.1%
Anne Arundel County RB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
$ 1,000,000 3.65% 03/10/97 $ 1,000,000
5,380,000 3.60 03/13/97 5,380,000
Baltimore County PCRB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
5,000,000 3.70 01/15/97 5,000,000
- -------------------------------------------------------------------
$11,380,000
- -------------------------------------------------------------------
Massachusetts--0.7%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$ 4,000,000 3.75% 02/28/97 $ 4,002,951
- -------------------------------------------------------------------
Michigan--1.0%
Michigan Job Development Authority VRDN for Mazda Motor
Manufacturing Series 1985 (Sumitomo Bank)(VMIG1)
$ 1,400,000 4.25% 01/07/97 $ 1,400,000
Michigan State Strategic Fund Ltd. RB for Dow Chemical Series 1994
(A-1/P-1)
4,200,000 5.10 01/01/97 4,200,000
- -------------------------------------------------------------------
$ 5,600,000
- -------------------------------------------------------------------
Minnesota--1.9%
Minnesota State Higher Education Facility VRDN for Carleton
College Series 3-L2(VMIG1)
$ 6,000,000 4.11% 01/07/97 $ 6,000,000
Port Authority of St. Paul VRDN for Weyerhauser Project Series 1993
(A-1)
4,000,000 4.21 01/07/97 4,000,000
- -------------------------------------------------------------------
$10,000,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Mississippi--0.6%
Grenada County Refunding RB VRDN for Georgia Pacific Corp. Series
1994 (Sumitomo Bank LOC)(A1/P-1)
$ 1,000,000 4.30% 01/07/97 $ 1,000,000
Jackson County PCRB for Chevron USA, Inc. Series 1992(VMIG1)
2,000,000 5.00 01/01/97 2,000,000
- -------------------------------------------------------------------
$ 3,000,000
- -------------------------------------------------------------------
Missouri--1.1%
Missouri Health & Educational Facility Authority VRDN for SSM
Health Care Series 1995 B (MBIA)(AAA)
$ 4,500,000 4.10% 01/07/97 $ 4,500,000
Missouri State Environmental Improvement & Energy Resources
Authority VRDN for Monsanto Corp. Series 1993(P-1)
1,500,000 4.20 01/07/97 1,500,000
- -------------------------------------------------------------------
$ 6,000,000
- -------------------------------------------------------------------
New Jersey--3.1%
State of New Jersey TRANS Series 1997 A(A-1+/P-1)
$17,000,000 3.50% 03/11/97 $17,000,000
- -------------------------------------------------------------------
New Mexico--0.9%
Albuquerque RB for Sisters of Charity Series 1992(A-1+/VMIG1)
$ 5,000,000 4.15% 01/07/97 $ 5,000,000
- -------------------------------------------------------------------
New York--9.5%
Great Neck North Water Authority Water System RB Series 1993 A
(FGIC)(A-1+/VMIG1)
$ 3,400,000 4.00% 01/07/97 $ 3,400,000
New York City GO Series 1994 B (Morgan Guaranty LOC)(A-1/VMIG1)
2,800,000 4.50 01/01/97 2,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
26,000,000 4.50 04/15/97 26,060,135
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
7,500,000 3.50 03/11/97 7,500,000
New York City Municipal Water Finance Authority RB Series 1995 A
(FGIC)(A-1+/VMIG1)
2,900,000 4.70 01/01/97 2,900,000
New York State Local Government VRDN Series 1995 C (Landesbank
Hessen-Thueringen Girozentrale LOC)(A-1+/VMIG1)
3,900,000 4.00 01/07/97 3,900,000
New York State Local Government VRDN Series 1995 G (National
Westminster Bank LOC)(A-1+/MIG1)
4,550,000 3.85 01/07/97 4,550,000
- -------------------------------------------------------------------
$51,110,135
- -------------------------------------------------------------------
North Carolina--6.8%
Rockingham County PCRB for Philip Morris Company Series
1992(A-1/P-1)
$ 7,700,000 4.15% 01/07/97 $ 7,700,000
Wake County PCRB for Carolina Power & Light Series 1990 A (Fuji
Bank LOC)(A-2/P-1)
18,870,000 3.55 02/10/97 18,870,000
Wake County PCRB for Carolina Power & Light Series 1990 B (Fuji
Bank LOC)(A-2/P-1)
10,000,000 3.75 02/13/97 10,000,000
- -------------------------------------------------------------------
$36,570,000
- -------------------------------------------------------------------
Ohio--2.2%
Columbus Electric System RB Series 1984 (Union Bank of Switzerland
LOC)(VMIG1)
$12,000,000 3.35% 01/31/97 $12,000,000
- -------------------------------------------------------------------
Oregon--1.7%
Portland Public Grain Elevator RB for Columbia Grain, Inc. Series
1984 (Fuji Bank/Bank of Tokyo LOC)(VMIG1)
$ 9,450,000 4.25% 01/07/97 $ 9,450,000
- -------------------------------------------------------------------
Pennsylvania--0.8%
Philadelphia TRANS Series 1996-7 A(SP-1/MIG1)
$ 4,500,000 4.50% 06/30/97 $ 4,511,725
- -------------------------------------------------------------------
Puerto Rico--2.3%
Commonwealth of Puerto Rico TRANS Series 1997 A(SP-1+/MIG1)
$12,500,000 4.00% 07/30/97 $12,540,250
- -------------------------------------------------------------------
South Carolina--1.1%
York County Floating/Fixed Rate PCRB Pooled Series 1984 N, North
Carolina Electric Membership Corp. (CFC)(A-1+/MIG1)
$ 5,775,000 4.15% 01/07/97 $ 5,775,000
- -------------------------------------------------------------------
Tennessee--0.6%
Blount County PCRB for Aluminum Company of America Series 1992
(A-1)
$ 2,450,000 4.15% 01/07/97 $ 2,450,000
Bradley County VRDN for Olin Corp. Series 1993 C (Wachovia Bank of
North Carolina LOC)(A-1+)
600,000 5.25 01/01/97 600,000
- -------------------------------------------------------------------
$ 3,050,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Texas--10.5%
Gulf Coast Waste Disposal Authority PCRB for Monsanto Corp. Series
1996(P-1)
$ 5,300,000 4.20% 01/07/97 $ 5,300,000
Harris County Hospital RB for Children's Hospital Series 1989
B-2(VMIG1)
10,000,000 4.10 01/07/97 10,000,000
Harris County Toll Road Adjustable/Fixed Rate Series 1994 C
(A-1+/VMIG1)
1,500,000 4.05 01/07/97 1,500,000
Houston GO Series A(A-1+/P-1)
5,000,000 3.50 03/12/97 5,000,000
Lower Colorado River Authority CP Notes Series C(A-1/P-1)
7,000,000 3.50 03/13/97 7,000,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
17,700,000 5.00 01/02/97 17,700,000
State of Texas TRANS Series 1996(SP-1+/MIG1)
10,000,000 4.75 08/29/97 10,050,571
- -------------------------------------------------------------------
$56,550,571
- -------------------------------------------------------------------
Virginia--4.6%
Louisa IDA PCRB for Virginia Electric & Power Series 1984(A-1/P-1)
$ 3,900,000 3.65% 01/24/97 $ 3,900,000
1,500,000 3.60 01/29/97 1,500,000
4,000,000 3.60 02/18/97 4,000,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
3,500,000 4.10 01/07/97 3,500,000
York County IDA PCRB for Virginia Electric & Power Series 1985
(A-1/A3)
9,000,000 3.70 01/14/97 9,000,000
2,900,000 3.60 02/05/97 2,900,000
- -------------------------------------------------------------------
$24,800,000
- -------------------------------------------------------------------
Washington--4.4%
Washington Healthcare Facility Authority VRDN for Sisters of
Providence Series 1985 B and E(A-1+/VMIG1)
$ 2,900,000 5.00% 01/01/97 $ 2,900,000
Washington Public Power Supply Project Electric RB Series 1993 A-2
(Bank of America LOC)(A-1/VMIG1)
20,880,000 4.10 01/07/97 20,880,000
- -------------------------------------------------------------------
$23,780,000
- -------------------------------------------------------------------
Wisconsin--1.5%
Milwaukee IDRB Multi-Modal for Pharmacia & Upjohn, Inc. Series
1994(P-1)
$ 8,000,000 4.60% 01/07/97 $ 8,000,000
- -------------------------------------------------------------------
Wyoming--0.3%
Converse County PCRB for Pacificorp. Series 1994(AMBAC)
(A-1/VMIG1)
$ 1,700,000 5.00% 01/01/97 $ 1,700,000
- -------------------------------------------------------------------
Total Investments $540,553,164/(a)/
===================================================================
/(a)/ The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rates indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
================================================================================
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
CFC --Unconditionally guaranteed by CFC, Cooperative Finance Corp.
CP --Commercial Paper
FGIC --Insured by Financial Guaranty Insurance Co.
FHLB --Federal Home Loan Bank
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDRB --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TRANS --Tax Revenue Anticipation Notes
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=======================================================================================
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at value
based on amortized cost $4,373,112,279 $2,964,020,412 $ 3,106,195,212 $1,230,446,987 $540,553,164
Interest receivable 11,583,246 11,328,488 2,442,834 3,375,926 2,193,518
Cash 88,907 53,776 72,630 25,740 160,336
Deferred organization expenses, net -- 21,473 -- -- 39,662
Other assets 107,980 65,537 181,145 117,177 14,269
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 4,384,892,412 2,975,489,686 3,108,891,821 1,233,965,830 542,960,949
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable 23,926,806 16,502,413 12,829,625 5,834,710 1,711,051
Accrued expenses and other liabilities 989,400 969,498 919,263 588,231 164,840
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,916,206 17,471,911 13,748,888 6,422,941 1,875,891
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
Accumulated undistributed net realized
gain (loss) on investments 1,090 954 80,038 26,484 (12,859)
===================================================================================================================================
Net assets $4,359,976,206 $2,958,017,775 $3,095,142,933 $ 1,227,542,889 $541,085,058
===================================================================================================================================
Net asset value, offering and redemption
price per share (net assets/shares
outstanding) $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
FST shares 3,901,792,070 2,540,361,007 2,290,967,452 858,743,905 440,850,118
FST Administration shares 215,900,253 165,764,727 536,903,385 145,103,169 51,661,795
FST Service shares 115,154,059 234,380,537 220,555,465 223,556,901 19,855,446
FST Preferred shares 127,128,734 17,510,550 46,636,593 112,430 28,730,558
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest
outstanding, $0.01 par value
(unlimited number of shares
authorized) 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
==================================================================================
<S> <C> <C> <C> <C> <C>
Investment income:
Interest income $273,607,363 $168,464,120 $ 130,875,226 $69,659,598 $19,750,787
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 3,751,933 2,295,135 1,818,328 961,337 420,548
Account administration fees 6,503,286 3,978,642 3,152,251 1,667,071 728,870
Custodian fees 591,036 401,612 349,064 224,733 31,788
Registration fees 143,509 118,595 229,757 143,620 24,284
Trustee fees 78,242 51,602 31,550 16,933 9,385
Amortization of deferred organization expenses -- 9,065 -- -- 15,626
Other 325,076 181,947 184,245 95,419 59,633
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 11,393,082 7,036,598 5,765,195 3,109,113 1,290,134
Less--Expenses reimbursable and fees
waived by Goldman Sachs (2,388,496) (1,598,929) (1,400,520) (800,866) (302,339)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 9,004,586 5,437,669 4,364,675 2,308,247 987,795
Administration share fees 527,357 474,043 1,100,814 250,618 128,721
Service share fees 541,076 271,936 849,624 1,258,434 91,599
Preferred share fees 42,963 2,874 15,097 395 13,155
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses and share fees 10,115,982 6,186,522 6,330,210 3,817,694 1,221,270
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 263,491,381 162,277,598 124,545,016 65,841,904 18,529,517
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 105,304 189,110 587,091 136,538 (5,995)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $263,596,685 $162,466,708 $125,132,107 $65,978,442 $18,523,522
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 263,491,381 $ 162,277,598 $ 124,545,016 $ 65,841,904 $ 18,529,517
Net realized gain (loss) on
investment transactions 105,304 189,110 587,091 136,538 (5,995)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 263,596,685 162,466,708 125,132,107 65,978,442 18,523,522
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (245,389,523) (149,928,272) (93,857,124) (48,867,861) (15,981,710)
FST Administration shares (10,697,750) (9,558,151) (21,870,105) (5,023,737) (1,593,538)
FST Service shares (5,164,431) (2,628,897) (8,020,699) (11,930,553) (522,532)
FST Preferred shares (2,239,677) (162,278) (797,088) (19,753) (431,737)
Net realized gain on investment transactions
FST shares (128,847) (173,838) (385,734) (81,682) --
FST Administration shares (5,617) (11,082) (89,882) (8,397) --
FST Service shares (2,712) (3,048) (32,963) (19,942) --
FST Preferred shares (1,177) (188) (3,276) (33) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders (263,629,734) (162,465,754) (125,056,871) (65,951,958) (18,529,517)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 48,481,127,400 44,257,102,764 20,383,057,696 14,111,648,633 4,669,259,507
Reinvestment of dividends and
distributions 126,514,648 91,077,089 45,060,831 21,912,928 6,495,873
Cost of shares repurchased (47,756,596,271) (43,600,991,427) (19,343,068,853) (13,746,823,336) (4,623,830,243)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share
transactions 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 851,012,728 747,189,380 1,085,124,910 386,764,709 51,919,142
Net Assets:
Beginning of year 3,508,963,478 2,210,828,395 2,010,018,023 840,778,180 489,165,916
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 4,359,976,206 $2,958,017,775 $ 3,095,142,933 $1,227,542,889 $ 541,085,058
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 247,196,840 $ 136,963,014 $ 79,821,378 $ 38,042,394 $ 13,622,900
Net realized gain (loss) on
investment transactions 95,511 7,374 781,869 65,308 (6,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 247,292,351 136,970,388 80,603,247 38,107,702 13,616,036
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (236,894,656) (130,522,374) (63,729,881) (34,713,840) (12,702,550)
FST Administration shares (7,108,569) (6,351,769) (9,995,927) (2,917,098) (455,025)
FST Service shares (3,193,615) (88,871) (6,095,570) (411,456) (465,325)
Net realized gain on investment transactions
FST shares (55,079) (9,474) (612,499) (59,324) --
FST Administration shares (4,463) (504) (99,062) (5,878) --
FST Service shares (1,830) -- (62,143) (106) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (247,258,212) (136,972,992) (80,595,082) (38,107,702) (13,622,900)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 35,913,627,249 33,159,975,346 12,055,344,504 8,904,113,596 3,459,116,162
Reinvestment of dividends and
distributions 88,104,801 69,894,471 14,492,584 15,345,902 3,954,598
Cost of shares repurchased (35,375,137,049) (31,948,570,256) (11,181,309,002) (8,391,284,391) (3,161,776,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share transactions 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 626,629,140 1,281,296,957 888,536,251 528,175,107 301,287,017
Net Assets:
Beginning of year 2,882,334,338 929,531,438 1,121,481,772 312,603,073 187,878,899
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 3,508,963,478 $ 2,210,828,395 $ 2,010,018,023 $ 840,778,180 $ 489,165,916
====================================================================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 34,469,057,699 31,539,337,948 8,859,672,375 8,279,786,329 3,135,487,639
Reinvestment of dividends and
distributions 85,898,572 66,409,325 11,189,134 14,336,357 3,262,842
Shares repurchased (34,034,050,903) (30,399,518,678) (8,241,356,158) (7,808,586,957) (2,873,945,734)
- ------------------------------------------------------------------------------------------------------------------------------------
520,905,368 1,206,228,595 629,505,351 485,535,729 264,804,747
- ------------------------------------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 721,501,944 1,608,362,145 1,309,118,844 331,435,289 110,334,205
Reinvestment of dividends and
distributions 761,953 3,443,404 845,389 785,525 320,945
Shares repurchased (640,480,667) (1,540,953,481) (1,108,896,222) (304,089,584) (91,758,941)
- ------------------------------------------------------------------------------------------------------------------------------------
81,783,230 70,852,068 201,068,011 28,131,230 18,896,209
- ------------------------------------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 723,067,606 12,275,253 1,886,553,285 292,891,978 213,294,318
Reinvestment of dividends and
distributions 1,444,276 41,742 2,458,061 224,020 370,811
Shares repurchased (700,605,479) (8,098,097) (1,831,056,622) (278,607,850) (196,072,204)
- ------------------------------------------------------------------------------------------------------------------------------------
23,906,403 4,218,898 57,954,724 14,508,148 17,592,925
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in shares 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Financial Square Funds, collectively "the Funds" or individually a "Fund". The
Trust is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. Financial Square consists of seven
diversified funds: Prime Obligations, Money Market, Treasury Obligations,
Government, Tax-Free Money Market , Municipal Money Market (inactive) and Money
Market Plus (inactive). The Financial Square Funds offer four classes of shares:
FST shares, FST Administration shares, FST Service shares and FST Preferred
shares. The investment objective of the Funds is to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
Each Fund uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- -------------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company taxable and tax-exempt income to
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax rules.
Therefore, the source of the Funds' distributions may be shown in the
accompanying financial statements as either from or in excess of net investment
income or net realized gain on investment transactions, or from paid-in capital,
depending on the type of book/tax differences that may exist.
At December 31, 1996, the Funds' tax year end, the Tax-Free Money Market
Fund had approximately $13,000 of capital loss carryforward for U.S. Federal tax
purposes. This capital loss carryforward expires in the year 2004.
D. Deferred Organization Expenses--
- ------------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
E. Expenses--
- --------------
Expenses incurred by the Funds that do not specifically relate to an individual
fund are allocated to the Funds based on each Fund's relative average net assets
for the period.
Shareholders of FST Administration, FST Service and FST Preferred shares
bear all expenses and fees paid to service organizations for their services with
respect to such shares as well as other expenses (subject to expense
limitations) that are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser pursuant to
an Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to general
- --------------------------------------------------------------------------------
19
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
supervision of the Trust's Board of Trustees, manages the portfolios of the
Funds. As compensation for the services rendered under the Investment Advisory
Agreement and the assumption of the expenses related thereto, GSAM is entitled
to a fee, computed daily and payable monthly, at an annual rate equal to .075%
of each Fund's average daily net assets. These amounts are included in "Accrued
expenses and other liabilities" in the accompanying Statements of Assets and
Liabilities.
Until further notice, GSAM has voluntarily agreed to limit certain of each
of the Fund's expenses (excluding advisory fees, account administration fees,
service organization fees, taxes, interest, brokerage commissions and
extraordinary expenses) to the extent that such expenses exceed .01% per annum
of that Fund's average daily net assets. These amounts are included in "Other
assets" in the accompanying Statements of Assets and Liabilities.
GSAM also serves as administrator pursuant to an Administration Agreement.
Under the Administration Agreement, GSAM administers each Fund's business
affairs, including providing facilities and transfer agency services. As
compensation for the services rendered under the Administration Agreement, GSAM
is entitled to a fee, computed daily and payable monthly, at an annual rate
equal to .13% of each Fund's average daily net assets. These amounts are
included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and receives no fee. The following chart outlines the
waivers and reimbursements for the year ended December 31, 1996 and amounts owed
to affiliates and due from GSAM at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Adviser Expense Amounts Amounts
Fee Reimburs- due to due from
Fund Waived ements Total GSAM GSAM
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime
Obligations
Fund $1,751 $637 $2,388 $777 $108
- ---------------------------------------------------------------------
Money
Market
Fund 1,142 457 1,599 552 65
- ---------------------------------------------------------------------
Treasury
Obligations
Fund 848 553 1,401 419 155
- ---------------------------------------------------------------------
Government
Fund 449 352 801 197 117
- ---------------------------------------------------------------------
Tax-Free
Money
Market
Fund 217 85 302 86 13
- ---------------------------------------------------------------------
</TABLE>
4. Administration, Service and Preferred Plans
The Funds have adopted Administration, Service and Preferred Plans to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration, Service and Preferred Plans provide for
compensation to the service organizations in an amount up to .25% , .50% and
.10% (on an annualized basis), respectively, of the average daily net asset
value of the respective shares.
5. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended December
31, 1996, the Funds did not have any borrowings under this facility.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Fund's custodian.
7. Joint Repurchase Agreement Accounts
The Funds, together with other registered investment companies having advisory
agreements with GSAM or its affiliates, transfer uninvested cash balances into
joint accounts, the daily aggregate balances of which are invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations.
At December 31, 1996, the Prime Obligations, Money Market, Treasury
Obligations and Government Funds had undivided interests in the repurchase
agreements in the following joint account, which equaled $297,900,000,
$205,200,000, $1,419,100,000 and $351,600,000 in principal amount, respectively.
At December 31, 1996, the repurchase agreements in this joint account, along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date), were as follows:
- --------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$ 200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933 (U.S.
Treasury Notes: $129,531,177, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- --------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
==========================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Fund may enter into certain
principal transactions, including repurchase agreements, with Goldman, Sachs &
Co. subject to certain limitations as follows: 25% of eligible security
transactions, as defined, and 10% of repurchase agreement transactions.
21
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
9. Summary of Share Transactions
Share activity for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Tax-Free
Prime Obligations Money Market Treasury Government Money Market
Fund Fund Obligations Fund Fund Fund
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FST Shares:
Shares sold 44,941,258,260 41,611,799,874 15,303,462,361 11,674,849,553 4,186,677,890
Reinvestment of dividends and
distributions 120,569,689 84,724,371 33,617,264 19,640,980 4,879,667
Shares repurchased (44,455,790,432) (41,225,360,339) (14,633,812,470) (11,579,631,835) (4,199,081,918)
------------------------------------------------------------------------------------------------
606,037,517 471,163,906 703,267,155 114,858,698 (7,524,361)
FST Administration Shares:
Shares sold 1,718,885,581 2,097,089,351 2,868,056,191 1,074,614,378 177,906,627
Reinvestment of dividends and
distributions 2,721,453 5,879,304 4,640,302 1,055,828 844,377
Shares repurchased (1,653,602,695) (2,074,616,324) (2,618,986,546) (1,012,951,862) (148,027,716)
------------------------------------------------------------------------------------------------
68,004,339 28,352,331 253,709,947 62,718,344 30,723,288
FST Service Shares:
Shares sold 1,442,987,405 470,852,368 2,117,230,142 1,353,982,373 239,131,409
Reinvestment of dividends and
distributions 3,217,249 397,187 6,330,034 1,208,640 449,321
Shares repurchased (1,396,329,467) (241,087,916) (2,042,124,197) (1,146,142,260) (239,585,078)
------------------------------------------------------------------------------------------------
49,875,187 230,161,639 81,435,979 209,048,753 (4,348)
FST Preferred Shares:
Shares sold 377,996,154 77,361,171 94,309,002 8,202,329 65,543,581
Reinvestment of dividends and
distributions 6,257 76,227 473,231 7,480 322,508
Shares repurchased (250,873,677) (59,926,848) (48,145,640) (8,097,379) (37,135,531)
------------------------------------------------------------------------------------------------
127,128,734 17,510,550 46,636,593 112,430 28,730,558
------------------------------------------------------------------------------------------------
Net increase in shares 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Ratio of net
Net asset Net realized Total Net asset expenses to
value at Net gain income from Distributions value at average
beginning investment on investment investment to end Total net
of period income transactions operations shareholders of period return(a) assets
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0529 $-- $0.0529 $(0.0529) $1.00 5.41% 0.18%
1996-FST Preferred shares/(c)/... 1.00 0.0346 -- 0.0346 (0.0346) 1.00 5.28/(b)/ 0.28/(b)/
1996-FST Administration shares .. 1.00 0.0506 -- 0.0506 (0.0506) 1.00 5.14 0.43
1996-FST Service shares ......... 1.00 0.0478 -- 0.0478 (0.0478) 1.00 4.88 0.68
1995-FST shares ................. 1.00 0.0586 -- 0.0586 (0.0586) 1.00 6.02 0.18
1995-FST Administration shares .. 1.00 0.0559 -- 0.0559 (0.0559) 1.00 5.75 0.43
1995-FST Service shares ......... 1.00 0.0533 -- 0.0533 (0.0533) 1.00 5.49 0.68
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.38/(b)/ 0.18/(b)/
1994-FST Administration shares/(d)/ 1.00 0.0383 -- 0.0383 (0.0383) 1.00 4.12/(b)/ 0.43/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.86/(b)/ 0.68/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0311 0.0002 0.0313 (0.0313) 1.00 3.18 0.17
1994-FST Administration shares .. 1.00 0.0286 0.0002 0.0288 (0.0288) 1.00 2.92 0.42
1994-FST Service shares ......... 1.00 0.0261 0.0002 0.0263 (0.0263) 1.00 2.66 0.67
1993-FST shares ................. 1.00 0.0360 0.0007 0.0367 (0.0367) 1.00 3.75 0.18
1993-FST Administration shares/(e)/ 1.00 0.0068 0.0001 0.0069 (0.0069) 1.00 3.02/(b)/ 0.44/(b)/
1993-FST Service shares ......... 1.00 0.0301 0.0007 0.0308 (0.0308) 1.00 3.23 0.68
1992-FST shares ................. 1.00 0.0572 0.0002 0.0574 (0.0574) 1.00 5.99 0.18
1992-FST Service shares (e)...... 1.00 0.0027 -- 0.0027 (0.0027) 1.00 4.10/(b)/ 0.66/(b)/
For the Period March 8, 1990 (f)
- --------------------------------
through January 31,
- -------------------
1991-FST shares ................. 1.00 0.0727 -- 0.0727 (0.0727) 1.00 8.27/(b)/ 0.18/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Net Ratio of net
assets at Ratio of investment
end expenses to income to
of period average net average net
(in 000's) assets assets
----------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $3,901,797 0.23% 5.24%
1996-FST Preferred shares/(c)/... 127,126 0.33/(b)/ 5.14/(b)/
1996-FST Administration shares .. 215,898 0.48 5.01
1996-FST Service shares ......... 115,154 0.73 4.73
1995-FST shares ................. 3,295,791 0.22 5.82
1995-FST Administration shares .. 147,894 0.47 5.55
1995-FST Service shares ......... 65,278 0.72 5.29
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 2,774,849 0.24/(b)/ 4.32/(b)/
1994-FST Administration shares/(d)/ 66,113 0.49/(b)/ 4.12/(b)/
1994-FST Service shares/(d)/..... 41,372 0.74/(b)/ 3.92/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1,831,413 0.25 3.03
1994-FST Administration shares .. 35,250 0.50 2.78
1994-FST Service shares ......... 14,001 0.75 2.53
1993-FST shares ................. 813,126 0.25 3.53
1993-FST Administration shares/(e)/ 1,124 0.52/(b)/ 2.88/(b)/
1993-FST Service shares ......... 336 0.75 2.94
1992-FST shares ................. 917,073 0.27 5.63
1992-FST Service shares/(e)/..... 118 0.74/(b)/ 4.02/(b)/
For the Period March 8, 1990/(f)/
- ---------------------------------
through January 31,
- -------------------
1991-FST shares ................. 578,495 0.28/(b)/ 7.94/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration share and FST Service share activity commenced during
November of 1992 and January of 1992, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=================================
Net Asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end
of period income transactions operations shareholders of period
=========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares ................. $1.00 $0.0533 $0.0001 $0.0534 $(0.0534) $1.00
1996-FST Preferred shares/(c)/... 1.00 0.0348 -- 0.0348 (0.0348) 1.00
1996-FST Administration shares .. 1.00 0.0504 0.0001 0.0505 (0.0505) 1.00
1996-FST Service shares ......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995-FST shares ................. 1.00 0.0589 -- 0.0589 (0.0589) 1.00
1995-FST Administration shares .. 1.00 0.0561 -- 0.0561 (0.0561) 1.00
1995-FST Service shares/(d)/..... 1.00 0.0231 -- 0.0231 (0.0231) 1.00
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 1.00 0.0305 -- 0.0305 (0.0305) 1.00
1994-FST Administration shares
/(d)/......................... 1.00 0.0298 -- 0.0298 (0.0298) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
Total average net average net of period average net average net
return/(a)/ assets assets (in 000's) assets assets
==========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares.................. 5.45% 0.18% 5.33% $2,540,366 0.23% 5.28%
1996-FST Preferred shares/(c)/... 5.31/(b)/ 0.28/(b)/ 5.23/(b)/ 17,510 0.33/(b)/ 5.18/(b)/
1996-FST Administration shares... 5.19 0.43 5.04 165,766 0.48 4.99
1996-FST Service shares.......... 4.93 0.68 4.84 234,376 0.73 4.79
1995-FST shares................. 6.07 0.15 5.89 2,069,197 0.23 5.81
1995-FST Adminstration shares.... 5.80 0.40 5.61 137,412 0.48 5.53
1995-FST Services shares/(d)/.... 5.41/(b)/ 0.65/(b)/ 4.93/(b)/ 4,219 0.73/(b)/ 4.85/(b)/
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 4.91/(b)/ 0.11/(b)/ 4.88/(b)/ 862,971 0.25/(b)/ 4.74/(b)/
1994-FST Adminstration shares/(d)/ 4.65/(b)/ 0.36/(b)/ 4.82/(b)/ 66,560 0.50/(b)/ 4.68/(b)/
</TABLE>
- ------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST, FST Adminstration and FST Service share activity commenced May 18,
1994, May 20, 1994 and July 14, 1995, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain (loss) from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0522 $0.0003 $0.0525 $(0.0524) $1.00 5.35%
1996-FST Preferred shares/(c)/... 1.00 0.0342 0.0001 0.0343 (0.0343) 1.00 5.24/(b)/
1996-FST Administration shares .. 1.00 0.0497 0.0002 0.0499 (0.0498) 1.00 5.09
1996-FST Service shares ......... 1.00 0.0472 0.0002 0.0474 (0.0474) 1.00 4.83
1995-FST shares ................. 1.00 0.0573 0.0005 0.0578 (0.0578) 1.00 5.96
1995-FST Administration shares .. 1.00 0.0547 0.0005 0.0552 (0.0552) 1.00 5.69
1995-FST Service shares ......... 1.00 0.0521 0.0005 0.0526 (0.0526) 1.00 5.43
For the Year Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 1.00 0.0379 (0.0001) 0.0378 (0.0378) 1.00 4.23/(b)/
1994-FST Administration shares
/(d)/.......................... 1.00 0.0388 (0.0001) 0.0387 (0.0387) 1.00 3.97/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0349 (0.0001) 0.0348 (0.0348) 1.00 3.71/(b)/
For the Year Ended December 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0301 0.0007 0.0308 (0.0307) 1.00 3.11
1994-FST Administration shares .. 1.00 0.0276 0.0006 0.0282 (0.0281) 1.00 2.85
1994-FST Service shares ......... 1.00 0.0251 0.0008 0.0259 (0.0256) 1.00 2.60
1993-FST shares ................. 1.00 0.0342 0.0012 0.0354 (0.0355) 1.00 3.69
1993-FST Administration shares
/(e)/.......................... 1.00 0.0009 -- 0.0009 (0.0009) 1.00 2.83/(b)/
1993-FST Service shares ......... 1.00 0.0296 0.0016 0.0312 (0.0309) 1.00 3.17
1992-FST shares ................. 1.00 0.0549 0.0015 0.0564 (0.0561) 1.00 5.84
1992-FST Service shares/(e)/..... 1.00 0.0113 0.0006 0.0119 (0.0116) 1.00 4.47/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -------------------------------------------
1991-FST shares ................. 1.00 0.0600 0.0006 0.0606 (0.0605) 1.00 8.06/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.22% $2,291,051 0.24% 5.16%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.11/(b)/ 46,637 0.34/(b)/ 5.05/(b)/
1996-FST Administration shares .. 0.43 4.97 536,895 0.49 4.91
1996-FST Service shares ......... 0.68 4.72 220,560 0.74 4.66
1995-FST shares ................. 0.18 5.73 1,587,715 0.23 5.68
1995-FST Administration shares .. 0.43 5.47 283,186 0.48 5.42
1995-FST Service shares ......... 0.68 5.21 139,117 0.73 5.16
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 0.18/(b)/ 4.13/(b)/ 958,196 0.25/(b)/ 4.06/(b)/
1994-FST Administration shares
/(d)/.......................... 0.43/(b)/ 4.24/(b)/ 82,124 0.50/(b)/ 4.17/(b)/
1994-FST Service shares/(d)/..... 0.68/(b)/ 3.82/(b)/ 81,162 0.75/(b)/ 3.75/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 0.17 3.01 812,420 0.24 2.94
1994-FST Administration shares .. 0.42 2.76 24,485 0.49 2.69
1994-FST Service shares ......... 0.67 2.51 35,656 0.74 2.44
1993-FST shares ................. 0.18 3.42 776,181 0.26 3.34
1993-FST Administration shares
/(e)/.......................... 0.43/(b)/ 2.83/(b)/ 1 0.51/(b)/ 2.75/(b)/
1993-FST Service shares ......... 0.68 2.96 5,155 0.76 2.88
1992-FST shares ................. 0.18 5.49 413,171 0.28 5.39
1992-FST Service shares/(e)/..... 0.68/(b)/ 3.77/(b)/ 3,634 0.78/(b)/ 3.67/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -----------------------------------
1991-FST shares ................. 0.21/(b)/ 7.74/(b)/ 229,988 0.34/(b)/ 7.61/(b)/
- ----------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration and FST Service share activity commenced during January
of 1993 and October of 1991, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0525 $0.0001 $0.0526 $(0.0526) $1.00 5.38%
1996-FST Preferred shares/(c)/... 1.00 0.0344 0.0001 0.0345 (0.0345) 1.00 5.26/(b)/
1996-FST Administration shares .. 1.00 0.0501 0.0001 0.0502 (0.0502) 1.00 5.12
1996-FST Service shares ......... 1.00 0.0474 0.0001 0.0475 (0.0475) 1.00 4.86
1995-FST shares ................. 1.00 0.0581 0.0001 0.0582 (0.0582) 1.00 6.00
1995-FST Administration shares .. 1.00 0.0554 0.0001 0.0555 (0.0555) 1.00 5.74
1995-FST Service shares/(d)/..... 1.00 0.0320 -- 0.0320 (0.0320) 1.00 5.40/(b)/
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(e)/............. 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.36/(b)/
1994-FST Administration shares
/(e)/.......................... 1.00 0.0426 -- 0.0426 (0.0426) 1.00 4.10/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 1.00 0.0256 0.0001 0.0257 (0.0257) 1.00 3.14/(b)/
1993-FST Administration shares
/(d)/.......................... 1.00 0.0120 0.0001 0.0121 (0.0121) 1.00 2.87/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.25% $858,769 0.24% 5.19%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.14/(b)/ 112 0.34/(b)/ 5.08/(b)/
1996-FST Administration shares .. 0.43 5.01 145,108 0.49 4.95
1996-FST Service shares ......... 0.68 4.74 223,554 0.74 4.68
1995-FST shares ................. 0.18 5.81 743,884 0.24 5.75
1995-FST Administration shares .. 0.43 5.54 82,386 0.49 5.48
1995-FST Service shares/(d)/..... 0.68/(b)/ 5.08/(b)/ 14,508 0.74/(b)/ 5.02/(b)/
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(e)/............. 0.15/(b)/ 4.64/(b)/ 258,350 0.25/(b)/ 4.54/(b)/
1994-FST Administration shares
/(e)/.......................... 0.40/(b)/ 4.67/(b)/ 54,253 0.50/(b)/ 4.57/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 0.08/(b)/ 3.10/(b)/ 44,697 0.59/(b)/ 2.59/(b)/
1993-FST Administration shares
/(d)/.......................... 0.35/(b)/ 2.85/(b)/ 14,126 0.76/(b)/ 2.44/(b)/
- ---------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced April 6, 1993, September 1, 1993 and May 16, 1995, respectively.
/(e)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations shareholders period return /(a)/
===========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... $1.00 $0.0335 -- $0.0335 $(0.0335) $1.00 3.39%
1996-FST Preferred shares /(c)/....... 1.00 0.0218 -- 0.0218 (0.0218) 1.00 3.30/(b)/
1996-FST Administration shares ....... 1.00 0.0310 -- 0.0310 (0.0310) 1.00 3.13
1996-FST Service shares .............. 1.00 0.0285 -- 0.0285 (0.0285) 1.00 2.88
1995-FST shares ...................... 1.00 0.0381 -- 0.0381 (0.0381) 1.00 3.89
1995-FST Administration shares ....... 1.00 0.0354 -- 0.0354 (0.0354) 1.00 3.63
1995-FST Service shares .............. 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.38
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 1.00 0.0156 -- 0.0156 (0.0156) 1.00 3.41/(b)/
1994-FST Administration shares /(d)/.. 1.00 0.0136 -- 0.0136 (0.0136) 1.00 3.19/(b)/
1994-FST Service shares /(d)/......... 1.00 0.0091 -- 0.0091 (0.0091) 1.00 3.11/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... 0.18% 3.35% $440,838 0.23% 3.30%
1996-FST Preferred shares /(c)/....... 0.28/(b)/ 3.26/(b)/ 28,731 0.33/(b)/ 3.21/(b)/
1996-FST Administration shares ....... 0.43 3.10 51,661 0.48 3.05
1996-FST Service shares .............. 0.68 2.85 19,855 0.73 2.80
1995-FST shares ...................... 0.14 3.81 448,367 0.24 3.71
1995-FST Administration shares ....... 0.39 3.54 20,939 0.49 3.44
1995-FST Service shares .............. 0.64 3.32 19,860 0.74 3.22
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 0.07/(b)/ 3.42/(b)/ 183,570 0.31/(b)/ 3.18/(b)/
1994-FST Administration shares /(d)/.. 0.32/(b)/ 3.25/(b)/ 2,042 0.56/(b)/ 3.01/(b)/
1994-FST Service shares /(d)/......... 0.57/(b)/ 3.32/(b)/ 2,267 0.81/(b)/ 3.08/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced July 19, 1994, August 1, 1994 and September 23, 1994,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Money Market
Trust--Financial Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Money Market Trust--Financial Square Funds (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds), including the
statements of investments, as of December 31, 1996, and the related statements
of operations, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Financial Square Funds as of December 31, 1996, the results of
their operations and the changes in their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- ------------------------------------- ---------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- -----------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--Financial
Square Funds Prospectus which contains facts concerning each Fund's objectives
and policies, management, expenses and other information.
- --------------------------------------------------------------------------------
31
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad
- ----------
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings indicated do not necessarily represent
ratings which will be given to these securities on the date of a Fund's fiscal
year end.
1-A
<PAGE>
times over the future. Uncertainty of position characterizes bonds in this
class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Moody's also provides credit ratings for commercial paper. These are
promissory obligations (1) not having an original maturity in excess of nine
months, and (2) backed by commercial banks. Notes bearing the designation P-1
have a superior capacity for repayment. Notes bearing the designation P-2 have
a strong capacity for repayment.
2-A
<PAGE>
Description of Ratings of State and Municipal
Commercial Paper
---------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually senior debt obligations which have an original
maturity in excess of nine months. Moody's two highest commercial paper rating
categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
STANDARD & POOR'S RATINGS GROUP
3-A
<PAGE>
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and
C the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair capacity
or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB-rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
4-A
<PAGE>
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B-rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC-debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
S&P's top ratings for notes issued after July 29, 1984 are SP-1 and SP-2.
The designation SP-1 indicates a very strong capacity to pay principal and
interest. A plus sign (+) is added for those issues determined to possess
overwhelming safety characteristics. An SP-2 designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A by S&P is regarded as having the greatest capacity
for timely payment. Commercial paper rated A-1 is described as having an
overwhelming or very strong degree of safety regarding timely payment.
Commercial Paper rated A-2 by
5-A
<PAGE>
Standard & Poor's is described as having a strong degree of safety regarding
timely payment.
STANDARD & POOR'S RATINGS GROUP
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Standard & Poor's two highest commercial paper rating categories
are as follows:
A-1: This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable t the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity
for timely payment.
C: This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes such
payments will be made during such grace period.
FITCH INVESTORS SERVICE, L.P.
Bond Ratings
- ------------
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings
take into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
6-A
<PAGE>
AA: Bonds rated AA are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating
7-A
<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"), 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"), 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 Funds offer banks, corporate cash manag ers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized ser vice, 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 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..................... 22
The Adviser, Distributor
and Transfer Agent................... 28
Portfolio Transactions.................... 33
Net Asset Value........................... 35
Redemptions............................... 37
Calculation of Yield Quotations........... 38
Tax Information........................... 42
Organization and Capitalization........... 47
Custodian and Subcustodian................ 52
Independent Accountants................... 52
Financial Statements...................... 52
Preferred Administration Plan............. 53
Appendix A (Description of Securities
Ratings)............................. A-1
</TABLE>
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 guaran-
tee 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 enter into repurchase
agreements only with primary dealers in U.S. Government Securities. A
repurchase agreement is an arrangement under which the purchaser (i.e., the
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 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, install-
ment 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, a Fund 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 Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets
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 any net capital gains
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
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<PAGE>
maintain in a segregated account cash or liquid assets 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
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<PAGE>
be eligible for purchase by a Fund, a variable or floating rate 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 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
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<PAGE>
Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board of Trustees, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance 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
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such custodial receipts are excluded from gross income for 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
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industrial user. Tax-Free Fund does not intend to invest in 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 finan-
cial 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
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<PAGE>
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 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
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<PAGE>
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 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,
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<PAGE>
the policy of each Fund that may enter into such 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 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 (except for Government
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 the 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 and 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 such 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 that (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through re verse repurchase agreements in
amounts up to 33/1/3/% of its total assets (including the amount borrowed),
(b) the Fund may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes, (c) the Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of port-
18
<PAGE>
folio securities, and (d) the Fund may purchase securities on margin to the
extent permitted by applicable law.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each 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 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.
Government Fund may not:
(1) with respect to 75% of its total assets taken at market value, invest more
than 5% of the value of the total assets of that Fund in the securities of any
one issuer, except U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. This restriction does not,
however, apply to any Fund classified as a non-diversified company under the
Investment Company Act;
(2) with respect to 75% of its total assets taken at market value, purchase the
securities of any one issuer if, as a result of such purchase, that Fund would
hold more than 10% of the outstanding voting securities of that issuer. This
restriction does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act;
(3) borrow money, except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowings and that no purchases of securities will be made if
such borrowings exceed 5% of the value of the Fund's assets. This restriction
does not apply to cash collateral received as a result of portfolio securities
lending;
19
<PAGE>
(4) mortgage, pledge or hypothecate its assets except to secure permitted
borrowings;
(5) act as underwriter of the securities issued by others, except to the extent
that the purchase of securities in accordance with a Fund's investment
objective and policies directly from the issuer thereof and the later
disposition thereof may be deemed to be underwriting;
(6) purchase securities if such purchase would cause more than 25% 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, provided that there is no limitation with respect to, and
the Fund reserves freedom of action, when otherwise consistent with its
investment policies to, concentrate its investments in, U.S. Government
securities, obligations (other than commercial paper) issued or guaranteed by
U.S. banks, and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by U.S. Government securities or such bank
obligations. (For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be industries,
and 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.
Such concentration may be effected when the Adviser determines that risk
adjusted returns in such industries are considered favorable relative to other
industries.)
(7) issue senior securities, except as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust;
(8) purchase or sell real estate (excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodities contracts. The Trust reserves the freedom to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities;
(9) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and entry into
repurchase agreements in accordance with such Fund's investment objective and
policies may be deemed to be loans;
(10) purchase securities on margin (except for delayed delivery or when-issued
transactions or such short-term credits as are necessary for the clearance of
transactions), make short sales of securities, maintain a short position, or
invest in or write puts, calls or combinations thereof (except that a Fund may
20
<PAGE>
acquire puts in connection with the acquisition of a debt instrument);
(11) invest in other companies for the purpose of exercising control or
management.
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.
As money market funds, the Funds 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 Fund's portfolio may not exceed
397 days and a Fund'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 Fund, other
than the Tax-Exempt Funds, as a matter of non-funda mental policy only invests
in First Tier securities. Portfolio diversification. The Prime Obligations,
Money Market Plus, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Free Money Market Funds may not invest more than
5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such
21
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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. 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 Fund , no more than 10%
of the Fund'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 Funds (which are
the only Funds that may 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 Funds' total assets may be invested in securities or puts issued by
the institution that issued the put. The Tax-Exempt Fund's investment in Second
Tier securities that are conduit securities, which are municipal securities
involving an agreement or arrangement providing for payment by a person other
than the issuer of the municipal security, that are not subject to an
unconditional demand feature, may not exceed 5% of the Fund's total assets and
the Fund's investment in such conduit securities issued by any issuer may not
exceed 1% of the Fund's total assets. Securities which are rated in the highest
short-term rating category by at least two Nationally Recognized Statistical
Rating Organizations ("NRSROs"), or if only one NRSRO has assigned a rating, by
that NRSRO, are "First Tier Securities". Securities rated in the top two short-
term rating categories by at least two NRSROs, but which are not First Tier
Securities are "Second Tier Securities." NRSROs include S&P, Moody's, Fitch
Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thomson BankWatch, Inc. For a description of their rating
categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a 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.
22
<PAGE>
<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); Senior
Vice President of Scott Paper Company
until June 1994; Director of Arkwright
Mutual Insurance Company; Trustee of
International House of Philadelphia;
Member of Cornell University Council;
Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-1996); Co-
Head of GSAM (since December 1994).
*Douglas C. Grip, 35 Trustee & Vice President, Goldman Sachs
One New York Plaza President (since May 1996); President, MFS
New York, NY 10004 Retirement Services Inc., of Massachu-
setts Financial Services (prior
thereto).
*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);
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
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
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).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza Commonwealth, Inc. (a managed dental
#218 care company, (since January 1996);
Northfield, IL 60093 Chairman and Chief Executive Officer,
MSP Communications Inc. (a company
engaged in radio broadcasting) (since
November 1988); Director, Federal
Express Corporation (since 1976),
Evanston Hospital Corporation (since
1980), First Commonwealth, Inc. (since
1988) and North American Private Equity
Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer of Ameritech (a
Lake Forest, IL 60045 telecommunications holding
company,(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug
store business); Director of Baker,
Fentress & Co. (a closed-end, management
investment company.
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. (since 1990); President and Chief
Suite 1400 Executive Officer, Microdot, Inc.
Chicago, IL 60602 (a diversified manufacturer of fastening
systems and
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ---------- -----------------------------
<S> <C> <C>
connectors)(January 1984 to
October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza GSAM (since April 1994); Assistant
New York, NY 10004 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 Investors Bank and Trust
10004 Company (November 1993 to July 1995); Audit
Manager of Arthur Andersen LLP (prior
thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since
4900 Sears Tower President June 1992); Director, Shareholder Servicing
Chicago, IL of GSAM (since June 1992).
60606
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL November 1989).
60606
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY Vice President and Assistant
10004 General Counsel of Goldman
Sachs (since June 1992);
Counsel to the Funds Group,
GSAM (since June 1992);
Partner, Hale and Dorr (Sep-
tember 1991 to June 1992).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Howard B. Surloff, 31 Assistant Assistant General Counsel and
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, GSAM (since November 1993); Asso-
ciate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since March
1997); Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, Assistant Legal Products Analyst,
33 Secretary Goldman Sachs (June 1993 to
85 Broad Street present); Funds Compliance
New York, NY 10004 Officer, Citibank Global Asset
Management (August 1991 to June 1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM (since 1988).
New York, NY 10004
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (since 1995-1996); 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 1,
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.
26
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman 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.** $28,050 $0 $62,450
Ashok N. Bakhru $35,126 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $29,198 $0 $58,954
William H. Springer $29,198 $0 $58,954
Richard P. Strubel $29,198 $0 $58,594
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including
the five Funds in existence on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
27
<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 certain
other expenses (excluding management fees, fees payable to Service
Organizations, 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 a
portion of its management fee.
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 Funds' custodian, fees and
expenses of the Funds' transfer agent, filing fees for the registration or
qualification of shares under federal or state securities laws, expenses of the
organization of the Funds, 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 Funds 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, their proportionate share of the compensation and
expenses of the Trust's "non-interested" Trustees, and extraordinary expenses
incurred by the Funds.
28
<PAGE>
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory and administration agreements. Effective May 1, 1997 the services
under such agreements were combined in the Management Agreement. The services
required to be performed for the Funds and the combined advisory and
administration fees payable by the Funds under the former advisory and
administration agreements are identical to the services and fees under the
Management Agreement. For the fiscal years ended December 31, 1996 and December
31, 1995 and the eleven months ended December 31, 1994 the amounts of the
management fee (including both advisory and administration fees) incurred by
each Fund were as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
----------- ----------- -----------
<S> <C> <C> <C>
Prime Obligations Fund $8,504,328 $7,194,392 $3,485,286
Money Market Fund/(1)/ 5,131,644 3,236,027 900,121
Treasury Obligations Fund 4,121,944 2,401,903 1,186,773
Government Fund 2,179,655 1,119,731 243,841
Tax-Free Money Market Fund/(2)/ 930,176 459,413 35,436
- ------------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ Commenced operations July 19, 1994.
GSAM has agreed that it will not impose a portion of its manage ment fee. Had
such fees been imposed, the following additional fees (including both advisory
and administration fees) would have been incurred by these Funds for the periods
indicated:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Fund $1,750,891 $3,173,924 $1,609,383
Money Market Fund/(1)/ 1,142,133 1,063,477 482,154
Treasury Obligations Fund 848,635 1,747,326 554,447
Government Fund 448,753 493,804 159,290
Tax-Free Money Market Fund/(2)/ 219,242 304,151 109,909
- ---------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ 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 Funds' shareholders approved the Management Agreement on April 21,
1997. The Manage ment 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 Fund (as defined
in the Investment Company Act) and, in either case, by a majority of "non-
interested" Trustees.
29
<PAGE>
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.
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 Funds would have incurred the following additional expenses:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Prime Obligations Fund $637,605 $382,318 $ -0-
Money Market Fund 456,796 420,234 N/A
Treasury Obligations 551,885 280,395 -0-
Government Fund 352,113 197,008 98,125
Tax-Free Money Market Fund 83,097 83,376 N/A
- --------------------------
</TABLE>
Each Fund may use any name derived from the name "Goldman Sachs" only as long as
its Management Agreement remains in effect. The 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 60 days' written notice to the Trust.
In managing the Tax-Free Money Market and Municipal Money Market Funds, 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 adminis trative and economic
characteristics.
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 with the Funds.
30
<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 29, 1996, Goldman Sachs
and its consolidated subsidiaries had assets of approximately $152 billion and
partners' capital of $5.2 billion. Goldman Sachs became registered as an
investment adviser in 1981. As of March 24, 1997, Goldman Sachs, together with
its affiliates, acted as investment adviser, administrator or distributor for
approximately $104.9 billion in total assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
- ----------------------------------------------------------------------------
GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and their
- -------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the Adviser and
its advisory affiliates have proprietary inter ests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed-income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds invest, which could
have an adverse impact on each Fund's performance. Such transactions,
particularly in respect of proprietary accounts or customer accounts other than
those included in the Adviser's and its advisory affiliates' asset management
activities, will be execut ed independently of the Funds' transactions and thus
at prices or rates that may be more or less favorable. When the Adviser and its
advisory affiliates seek to purchase or sell the same assets for their managed
accounts, including the Funds, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be peri-
31
<PAGE>
ods, for example, when the Adviser, and/or its affiliates, will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which, or in securities of issuers for which, the Adviser and/or
its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Funds, the Adviser may have access to
certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. The Adviser will not be under any
obligation, however, to effect transactions on behalf of the 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 propri
etary activities or portfolio strategies of Goldman Sachs and its affiliates or
the activities or strategies used for accounts managed by them or other customer
accounts could conflict with the transactions and strategies employed by the
Adviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the 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.
An investment policy committee which may include partners of Goldman Sachs and
its affiliates may develop general policies regarding a Fund's activities, but
will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the Adviser are
also principals or employees of Goldman Sachs or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other
32
<PAGE>
entities may be a consideration of which investors in the Funds
should be aware.
The Adviser may enter into transactions and invest in instruments in which
customers of Goldman Sachs serve as the counterparty, principal or issuer. In
such cases, such party's interests in the transaction will be adverse to the
interests of the Funds, and such party may have no incentive to assure that the
Funds obtain the best possible prices or terms in connection with the
transactions. Goldman Sachs and its affiliates may also create, write or issue
derivative instruments for customers of Goldman Sachs or its affiliates, the
underlying securities currencies or instruments of which may be those in which
the Funds invest or which may be based on the performance of a Fund. The Funds
may, subject to applicable law, purchase investments which are the subject of an
underwriting or other distribution by Goldman Sachs or its affiliates and may
also enter into transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interest of the client. To the extent affiliated transac tions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arm's-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms.
33
<PAGE>
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 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.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: Shearson Lehman, Chase Manhattan, Bear
Stearns Cos., Union Bank of Switzerland, Daiwa Securities America, Inc., Morgan
Stanley, Swiss Bank Corp., Smith Barney Shearson, Salomon Brothers, Inc., and
Bankers Trust. As of December 31, 1996, each Fund held the
34
<PAGE>
following amounts of securities of its regular broker/dealers as defined in Rule
10b-1 under the Investment Company Act, or their parents ($ in thousands); Prime
Obligations Fund - Bear Stearns ($149,014), Swiss Bank Corp. ($52,981), Chase
Manhattan ($246,912), Morgan Stanley & Co., Inc. ($267,039); Government Fund -
Bear Stearns ($50,000), Morgan Stanley & Co. ($138,753), Chase Manhattan
($115,627), Swiss Bank Corp. ($62,531); Treasury Obligations Fund - Swiss Bank
Corp. ($252,384), Bear Stearns ($125,000), Lehman Brothers ($125,000), Union
Bank of Switzerland ($125,000), Chase Manhattan ($466,686), Daiwa Securities
($125,000), Morgan Stanley & Co., Inc. ($560,024), Smith Barney Inc. ($100,000);
and Money Market Fund - Swiss Bank Corp. ($36,494), Chase Manhattan ($102,482),
Morgan Stanley & Co., Inc. ($103,879).
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund, Money
Market Plus 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, Money
Market Plus 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 have 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
35
<PAGE>
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.
The Trustees have 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 they deem 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 Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, 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 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 have 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 determine 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
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<PAGE>
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 creditors, 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
37
<PAGE>
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.
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 shares 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
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<PAGE>
the sum to the 365/7 power and subtracting one from the result, according to the
following formula:
<TABLE>
<S> <C>
Effective Yield=[(base period return + 1)/to the power of 365 divided by 7/] - 1.
</TABLE>
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 5.34 5.48 N/A
FST Administration Shares 5.09 5.23 N/A
FST Service Shares 4.84 4.98 N/A
FST Preferred Shares 5.24 5.38 N/A
Money Market Fund:
FST Shares 5.38 5.54 N/A
FST Administration Shares 5.13 5.29 N/A
FST Service Shares 4.88 5.04 N/A
FST Preferred Shares 5.28 5.44 N/A
Treasury Obligations Fund:
FST Shares 5.43 5.56 N/A
FST Administration Shares 5.18 5.31 N/A
FST Service Shares 4.93 5.06 N/A
FST Preferred Shares 5.33 5.42 N/A
Government Fund:
FST Shares 5.36 5.52 N/A
FST Administration Shares 5.11 5.27 N/A
FST Service Shares 4.86 5.02 N/A
FST Preferred Shares 5.26 5.42 N/A
Tax-Free Fund:
FST Shares 3.74 3.81 6.19
FST Administration Shares 3.49 3.56 5.78
FST Service Shares 3.24 3.31 5.36
FST Preferred Shares 3.64 3.71 6.03
</TABLE>
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<PAGE>
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, 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 5.29 5.43 N/A
FST Administration Shares 5.04 5.18 N/A
FST Service Shares 4.79 4.93 N/A
FST Preferred Shares 5.19 5.33 N/A
Money Market Fund:
FST Shares 5.35 5.49 N/A
FST Administration Shares 5.10 5.24 N/A
FST Service Shares 4.85 4.99 N/A
FST Preferred Shares 5.25 5.39 N/A
Treasury Obligations Fund:
FST Shares 5.36 5.51 N/A
FST Administration Shares 5.11 5.26 N/A
FST Service Shares 4.86 5.01 N/A
FST Preferred Shares 5.26 5.41 N/A
Government Fund:
FST Shares 5.31 5.45 N/A
FST Administration Shares 5.06 5.20 N/A
FST Service Shares 4.81 4.95 N/A
FST Preferred Shares 5.21 5.35 N/A
Tax-Free Fund:
FST Shares 3.70 3.76 6.13
FST Administration Shares 3.45 3.51 5.71
FST Service Shares 3.20 3.26 5.30
FST Preferred Shares 3.60 3.66 5.96
</TABLE>
40
<PAGE>
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 (but not limited to) Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Morningstar Mutual Funds, Micropol, 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 (without limitation): inflation and interest
rates, certificates of deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts and repurchase agreements. The Trust may
also compare a Fund's performance with that of other mutual funds with similar
investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Fund's portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Fund's performance data will be based on historical results and is not
intended to indicate future performance. A Fund's performance will vary based
on market conditions, portfolio expenses, portfolio investments and other
factors. Return for a Fund will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield of return.
The Trust may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request. The Trust may from time to time
summarize the substance of discussions contained in shareholder reports in
advertisements and publish the Adviser's views as to markets, the rationale for
a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to shareholders.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or
41
<PAGE>
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 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 gross income for the taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock, securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the 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 not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total (gross) assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the 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
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<PAGE>
and other 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 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. Dividends paid by a Fund from the
excess of net long-term capital gain (if any) 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. At December 31, 1996, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Tax Free Money Market Fund $13,000 2004
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
43
<PAGE>
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. 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, or earns other taxable
income any distributions of income from such investments or other taxable income
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 or eliminated 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 may
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the
44
<PAGE>
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 and with certain certifications required by the Internal
Revenue Service or if the Internal 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
applicable 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, if applicable, or that the investor is an
exempt recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in 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.
Redemptions (including exchanges) and other dispositions of Fund shares in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Funds successfully maintain a
constant net asset value per share. Shareholers should consult their own tax
advisers with reference to their particular circumstances to determine whether a
redemption, exchange or other disposition of Fund shares is properly treated as
a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder who is required to file a
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
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<PAGE>
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.
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. 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 and, if a current IRS Form W-8 or acceptable substitute is not on
file with the Fund, may be subject to backup witholding on certain payments.
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 a Fund 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, intangible property 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 intangible property 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.
46
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Funds were reorganized from series of a Massachusetts business trust as
part of Goldman Sachs Trust, a Delaware business trust, under a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares exists, each
class or series must be preferred over all other classes or series in respect of
assets specifically allo cated 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 Statement of Addition al Information,
the Trustees have 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 a 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 custom ers, 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, maintaining 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 mainte nance 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 0.50% of the
average daily net assets of such shares.
It is possible that an institution or its affiliates may offer different classes
of shares (i.e., FST Shares, FST Administration
47
<PAGE>
Shares, FST Service Shares or FST Preferred Shares) to its customers and thus
receive different compensation with respect to different classes of shares of
each 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 notice to shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transfer able and have no preemptive subscription or conversion rights.
As of the date of this Statement of Additional Information, no shares of
Municipal Fund and Plus Fund were outstanding.
As of April 1, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Prime Obligations Fund: Commerce Bank of
Kansas City, PO Box 248, Kansas City, MO 64141 (12.02%), Citicorp Trust NA as
Custodian, 400 Royal Palm Way, Palm Beach, FL 33480 (7.38%) and University of
Texas Systems, 201 W. 7th Street, Austin, TX (11.58%). As of April 1, 1997, the
entities noted below may have owned beneficially 5% or more of the outstanding
shares of Money Market Fund: Loral Corporation, 600 Third Avenue, New York, NY
10016 (9.13%), Chicago Trust Company, 171 N. Clark Street, #5CA, Chicago, IL
60601-3203(7.87%) and Citicorp Trust NA as Custodian, 400 Royal Palm Way, Palm
Beach, FL 33480 (6.50%). As of April 1, 1997, the entities noted below may have
owned beneficially 5% or more of the outstanding shares of Treasury Obligations
Fund: Commerce Bank of Kansas City, NA, PO Box 248, Kansas City, MO 64141
(11.34%), Associated Bank, P.O. Box 1007, Neehah, WI (7.98%), Amalgamated Bank
of Chicago, One West Monroe Street, Chicago, IL 60603 (6.31%), and Fulton Bank,
P.O. Box 3215, Lancaster, PA 17604 (5.52%). As of April 1, 1997, the entities
noted below may have owned beneficially 5% or more of the outstanding shares of
Government Fund: Chicago Trust Company, 171 N. Clark St., Chicago, IL 60601
(21.46%), Mellon Bank, Three Mellon Bank Center, Pittsburgh, PA 15258 (5.64%)
and Texas State Treasury, P.O. Box 12608, Austin, TX 78711 (10.35%). As of
April 1, 1997, the entities noted below may have owned beneficially 5% or more
of the outstanding shares of Tax-Free Fund: Mercantile Bank of St. Louis, N.A.,
Mandell & Company, P.O. Box 387 MPO, St. Louis, MO 63101 (10.48%), Hilliard
Lyons Trust Co., P.O. Box 32760,
48
<PAGE>
Louisville, KY 40232 (6.22%), Commerce Bank of Kansas City, P.O. Box 248, Kansas
City, MO 64141 (16.78%) and Summit Bank, P.O. Box 821, Hackensack, NJ 07602
(8.73%). As of April 1, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Federal Fund: Burlington
Bank & Trust, MATCO, P.O. Box 728, Burlington, IA 52601 (5.48%), Central
Carolina Bank & Trust Co., P.O. Box 931, Durham, NC 27702 (9.75%), Commerce Bank
NA, LENEXA, P.O. Box 419248, Kansas City, MO 64141 (5.64%), Commerce Bank of
Kansas City, P.O. Box 419248, BB4-1, Kansas City, MO 64141 (19.69%), First
National Bank of Southwestern Ohio, P.O. Box 476, Hamilton, OH 45012 (16.40%),
Mercantile Bank of St. Louis, N.A., Mandell & Company, P.O. Box 387 MPO, St.
Louis, MO 63101 (14.13%), United National Bank-NJ, Hubbell & Co., 202 Park
Avenue, Plainfield, NJ 07060 (6.28%). As of April 1, 1997, the entities noted
below may have owned beneficially 5% or more of the outstanding shares of
Treasury Instruments Fund: Central Bank & Trust Co., CEBANTCO, P.O. Box 1360,
Lexington, KY 40590 (10.48%), Chicago Trust Company, 171 N. Clark Street, #5CA,
Chicago, IL 60601 (5.06%), Harris Trust & Savings Bank, 200 W. Monroe Street,
Fl. 12, Chicago, IL 60606 (40.64%), Northern Capital Trust of Fargo, P.O. Box
829, Fargo, ND 58102 (16.70%), William Harris Investors, Inc., 2 N. LaSalle
Street, Ste. 400, Chicago, IL 60602 (22.01%).
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
The Trust is not required to hold annual meetings of shareholders and does not
intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees,
either to one vote for each share or to one vote for each dollar of net asset
value represented by such shares on all matters presented to shareholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote
separately from each other. Shareholders of the Trust do not have cumulative
voting rights in the election of Trustees. Meetings of shareholders of the
Trust, or any series or class thereof, may be called by the Trustees, certain
officers or upon the written request of holders of 10% or more of the shares
entitled to vote
49
<PAGE>
at such meetings. The shareholders of the Trust will have voting rights only
with respect to the limited number of matters specified in the Declaration of
Trust and such other matters as the Trustees may determine or may be required by
law.
The Declaration of Trust provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust acting on behalf of any
affected series, must, upon request by such shareholder, assume the defense of
any claim made against such shareholder for any act or obligation of the series
and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust
without a shareholder vote. However, shareholders of the Trust have the right
to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
50
<PAGE>
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or
classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Delaware law, the shareholders of the Funds are not gener ally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in 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 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 provides for indemnification by the relevant
Fund for all loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of 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 any judgment thereon. In view of the above,
the risk of personal liability of shareholders is remote.
In addition to the requirements under the Declaration of Trust, the Trust
provides that shareholders 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 Delaware law who hold at least 10% of the outstand
ing shares of the Fund, or 10% of the outstanding shares of the 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 and to employ
other advisers in considering the merit of the request and shall require an
undertaking by the shareholders making such request to reimburse the Fund for
the expense of any such advisers in the event that the Trustees determine not to
bring such action.
51
<PAGE>
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the 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
Arthur Andersen LLP, 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, Arthur Andersen LLP 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, 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.
52
<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 each 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, each
Fund, 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 the amount of preferred
administration fees paid by each Fund to Service Organizations was as follows:
<TABLE>
<CAPTION>
Dec. 1996
---------
<S> <C>
Prime Obligations Fund $42,963
Money Market Fund 2,874
Treasury Obligations Fund 15,097
Government Fund 395
Tax Free Fund 13,155
</TABLE>
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.
53
<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, most recently
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.
54
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Financial Square
Funds
- -------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Fund
Money Market Fund
Treasury Obligations Fund
Government Fund
Tax-Free Money Market Fund
- -------------
Goldman
Sachs
- -------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome this opportunity to provide you with a summary of the trends
and key events that affected the economy and the Goldman Sachs Money Market
Trust/Financial Square Funds in 1996. It was another strong year for the Funds,
during which all of the portfolios outperformed their respective IBC Financial
Data, Inc. averages during the period. Assets in the Financial Square Funds
totaled $12.2 billion as of December 31, 1996, up 34% from last year.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation.
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) at 2.0% annualized. Growth was more dramatic during
the second quarter, as industrial activity and automobile and home sales all
showed significant improvement, pushing real GDP to 4.7%, its highest rate in
two years. That growth caused some to expect the Fed to change direction and
tighten before year-end. However, the economy subsequently moderated
significantly, with third-quarter annualized real GDP retreating to 2.1%,
reflecting lackluster consumer spending and a widening U.S. trade deficit. As
1996 drew to a close, moderate economic growth and contained inflation kept the
Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
Funds' weighted average maturities and structures were equally important to our
strategy.
During the second and third quarters of 1996, we extended the Financial
Square Funds' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Funds closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for Financial Square Funds Institutional Shares* as of 12/31/96
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Weighted
SEC 7-Day SEC 7-Day 30-Day Average
Financial Square Current Effective Average Maturity
Funds Yield Yield Yield (days)
=====================================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.34% 5.48% 5.31% 41
- --------------------------------------------------------------------
Money Market 5.38% 5.54% 5.34% 37
- --------------------------------------------------------------------
Treasury
Obligations 5.43% 5.56% 5.29% 33
- --------------------------------------------------------------------
Government 5.36% 5.52% 5.30% 36
- --------------------------------------------------------------------
Tax-Free
Money Market 3.74% 3.81% 3.42% 34
- --------------------------------------------------------------------
</TABLE>
* Financial Square Funds offer four separate classes of shares (Institutional,
Preferred, Administration and Service), each of which is subject to different
fees and expenses that affect performance and entitle shareholders to different
services. The Preferred, Administration and Service shares offer financial
institutions the opportunity to receive a fee for providing administrative
support services. The Preferred shares pay 0.10%, Administration shares pay
0.25%, and the Service shares pay 0.50%. More complete information, including
management fees and expenses, is included in the Funds' prospectus or may be
obtained by calling Goldman Sachs Funds at 1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy Economy and a Strong
Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from the Orange County bankruptcy abated somewhat,
although various forms of credit enhancement remained popular, even among high-
quality issuers. Reflecting the strong national economy, many states and
localities experienced positive financial results, reducing their regular cash
flow borrowings.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Credit Picture Abroad: Europe Improved, While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks.
In Asia, creditworthiness was fairly stable. The notable negative
exception was the Japanese financial sector, which remained under pressure from
the ongoing weakness of the real estate markets, sluggish economic growth and
ongoing deregulation. However, Japan's largest banks have strong fundamentals
and will continue to be important and dominant players in the global financial
market. Australian credit quality strengthened through improved macroeconomic
balances, which provided evidence that Australia's recent boom-and-bust cycles
may be over. The weakness of Asian exports did not affect creditworthiness
directly; exports should recover this year, and the scare could prompt salutary
policy adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market Funds. The Goldman Sachs Credit Department, which has analysts based in
London, Tokyo, Frankfurt and New York, as well as extensive technological assets
and credit expertise, will continue to vigilantly monitor global developments.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, the Financial Square Funds will continue to be managed with
short-to-neutral average life targets and short, laddered structures to prepare
for the probability of higher rates ahead.
Extended Trading Hours Improve Service Further
To meet the needs of many institutional investors who receive inflows of
cash late in the day, we extended the trading hours for both purchases and
redemptions in the Financial Square Treasury Obligations Fund until 5:00 p.m.
EST. (The Financial Square Government Fund also provides late-day service.) We
have found many of our clients enjoy the added flexibility of late-day trading
and are increasing their use of this beneficial service.
In closing, we thank you for your support and for making 1996 a successful
year for the Financial Square Funds. We are pleased that many of you have joined
our conference calls following each Federal Open Market Committee meeting
throughout the year. Our goal is to continue to provide you with competitive
performance, as well as a range of value-added services that reflect the breadth
and depth of Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
- ---------------------
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations--53.0%
Bank Holding Companies
BankAmerica Corp.
$150,000,000 5.27% 03/21/97 $ 148,265,292
Chase Manhattan Corp.
100,000,000 5.28 03/14/97 98,944,000
JP Morgan & Co., Inc.
25,000,000 5.73 05/30/97 24,407,104
NationsBank Corp.
50,000,000 5.40 05/09/97 49,040,000
Business Credit Institutions
General Electric Capital Corp.
50,000,000 5.30 03/26/97 49,381,667
100,000,000 5.44 04/03/97 98,609,778
JC Penney Funding Corp.
50,000,000 5.31 01/31/97 49,778,750
Commercial Banks
CP Trust Certificates Series 1996
85,000,000 5.68/(a)/ 03/28/97 85,000,000
Financial Services
National Rural Utilities Cooperative
34,250,000 5.30 02/11/97 34,043,263
62,000,000 5.28 02/21/97 61,536,240
Life Insurance
Commonwealth Life Insurance Co.
20,000,000 5.64/(b)/ 05/08/97 20,000,000
Pacific Mutual Life Insurance Co.
50,000,000 5.52/(b)/ 02/28/97 50,000,000
Prudential Funding Corp.
50,000,000 6.50 01/02/97 49,990,972
50,000,000 5.43 02/28/97 49,562,583
Motor Vehicles and Equipment
Ford Motor Credit Co.
150,000,000 5.31 02/04/97 149,247,750
Personal Credit Institutions
Associates Corp. of North America
50,000,000 6.30 01/02/97 49,991,250
50,000,000 5.32 01/30/97 49,785,722
50,000,000 5.32 01/31/97 49,778,333
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
10,000,000 5.52 01/28/97 9,958,600
50,000,000 5.43 02/28/97 49,562,584
21,000,000 5.29 03/13/97 20,780,906
31,308,000 5.29 03/14/97 30,976,761
USAA Capital Corp.
30,000,000 5.34 04/07/97 29,572,800
Receivable/Asset Financings
Beta Finance Inc.
16,000,000 5.58 01/27/97 15,935,520
24,000,000 5.58 02/03/97 23,877,240
15,000,000 5.50 02/04/97 14,922,083
19,000,000 5.35 04/07/97 18,728,933
25,000,000 6.11 06/17/97 25,000,000
Delaware Funding Corp.
30,832,000 5.29 02/20/97 30,605,470
Enterprise Funding Corp.
50,000,000 5.33 01/23/97 49,837,139
International Lease Finance Corp.
60,000,000 5.30 03/17/97 59,337,500
20,000,000 5.29 03/24/97 19,759,011
New Center Asset Trust
25,000,000 5.52 01/28/97 24,896,500
25,000,000 5.37 04/04/97 24,653,188
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
100,000,000 5.30 02/13/97 99,366,945
50,000,000 5.30 02/18/97 49,646,667
C.S. First Boston, Inc.
60,000,000 5.33 01/22/97 59,813,450
Merrill Lynch & Co., Inc.
50,000,000 5.35 02/11/97 49,695,347
25,000,000 5.45 02/19/97 24,814,549
75,000,000 5.33 02/26/97 74,378,167
Morgan Stanley Group, Inc.
40,000,000 5.59 01/28/97 39,832,300
50,000,000 5.41 02/03/97 49,752,042
20,000,000 5.32 02/06/97 19,893,600
40,000,000 5.53 06/27/97 40,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations (continued)
Telecommunications
Ameritech Corp.
$ 70,000,000 5.34% 04/07/97 $ 69,003,200
Tobacco
Philip Morris Co.
70,000,000 6.50 01/02/97 69,987,361
- -------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $2,311,433,345
- -------------------------------------------------------------------
Bank Notes--15.6%
Dakota Certificates of Standard Credit Card Master Trust
$ 50,000,000 5.33%(b) 02/07/97 $ 49,726,097
FCC National Bank
40,000,000 5.70 05/22/97 39,953,925
75,000,000 6.00 06/02/97 75,003,030
First Bank FSB
50,000,000 5.62(b) 02/11/97 50,000,000
20,000,000 5.61(b) 04/11/97 19,998,937
First National Bank of Maryland
20,000,000 5.60(b) 09/30/97 19,994,187
Harris Trust & Savings Bank
16,500,000 6.04 06/17/97 16,520,097
Household Bank FSB
50,000,000 5.63(b) 09/23/97 49,997,602
Huntington National Bank
35,000,000 6.05 06/13/97 35,042,420
PNC Bank, N.A.
58,500,000 5.58(b) 04/01/97 58,488,742
100,000,000 5.40(b) 10/01/97 99,941,219
Society National Bank of Cleveland
100,000,000 5.58 05/14/97 99,961,237
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54(b) 05/15/97 24,995,313
- -------------------------------------------------------------------
Total Bank Notes $ 679,622,806
- -------------------------------------------------------------------
U.S. Government Agency Obligations--7.1%
Federal Farm Credit Bank
32,000,000 5.39 02/24/97 31,741,280
Federal Home Loan Mortgage Corp.
50,000,000 5.40 02/24/97 49,595,000
Federal National Mortgage Association
$200,000,000 5.36% 03/04/97 $ 198,153,778
30,000,000 5.35 03/17/97 29,665,625
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 309,155,683
- -------------------------------------------------------------------
Certificates of Deposit--6.9%
Chase Manhattan Corp.
$ 25,000,000 5.75% 02/03/97 $ 25,000,000
25,000,000 5.42 03/12/97 25,000,000
Mellon Bank, N.A.
50,000,000 5.35 02/19/97 50,000,000
100,000,000 5.50 04/07/97 100,000,000
Morgan Guaranty Trust Co.
50,000,000 5.65 02/03/97 50,000,445
Union Bank of California
50,000,000 5.58 02/28/97 50,000,000
- -------------------------------------------------------------------
Total Certificates of Deposit $ 300,000,445
- -------------------------------------------------------------------
Repurchase Agreements--17.7%
C.S. First Boston Corp., dated 12/31/96, repurchase price
$302,790,000 (FNMA: $308,478,596, 6.00%-6.18%, 02/01/09-04/01/34)
$300,000,000 5.40% 03/03/97 $ 300,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $102,538,618, 5.47%, 12/30/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$75,641,250 (FNMA: $78,669,875, 7.50%, 04/01/26)
75,000,000 5.40 02/26/97 75,000,000
Joint Repurchase Agreement Account
297,900,000 6.58 01/02/97 297,900,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 772,900,000
- -------------------------------------------------------------------
Total Investments $4,373,112,279/(c)/
===================================================================
/(a)/Variable rate security - base index is either U.S. Treasury
Bill, one or three month LIBOR, one month commercial paper,
Federal Funds or Prime lending rate
/(b)/Variable rate master note-base index is Federal Funds.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices. The percentages shown for each
investment category reflect the value of investments in that
category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Money Market Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Commercial Paper and Corporate Obligations--45.7%
Commercial Banks
CP Trust Certificates Series 1996
$ 60,000,000 5.68%\(a)\ 03/28/97 $ 60,000,000
Computer Software and Services
First Data Corp.
20,000,000 5.40 02/19/97 19,853,000
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
ABN Amro N.A.
50,000,000 5.45 02/28/97 49,560,972
Banca Crt Financial Corp.
15,000,000 5.35 01/31/97 14,933,125
22,945,000 5.42 04/01/97 22,634,095
20,000,000 5.47 04/03/97 19,720,422
13,000,000 5.42 04/08/97 12,810,149
BBL North America
125,000,000 6.90 01/02/97 124,976,042
Bex America, Inc.
36,000,000 5.36 01/21/97 35,892,900
Generale Bank
70,000,000 5.35 04/10/97 68,970,125
Nordbanken, N.A.
42,559,000 6.50 01/10/97 42,489,842
Royal Bank of Canada
100,000,000 6.50 01/02/97 99,981,944
San Paolo U.S. Finance Corp.
25,000,000 5.36 01/31/97 24,888,333
Swedbank, Inc.
100,000,000 5.47 02/04/97 99,483,389
Unifunding, Inc.
60,000,000 5.45 01/29/97 59,745,667
50,000,000 5.36 04/07/97 49,285,333
Life Insurance
Sunamerica Life Insurance Co.
50,000,000 5.50\(b)\ 09/02/97 50,000,000
Mortgage Brokers
Countrywide Funding Corp.
28,700,000 5.35 01/23/97 28,606,167
27,000,000 5.35 01/28/97 26,891,663
Countrywide Home Loans
50,000,000 6.65 01/02/97 49,990,764
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
16,312,000 5.57% 01/14/97 16,279,190
30,000,000 5.60 01/16/97 29,930,000
10,000,000 5.35 03/25/97 9,876,653
55,000,000 5.35 03/26/97 54,313,417
General Motors Acceptance Corp.
20,000,000 5.57 02/04/97 19,894,789
50,000,000 5.47 04/07/97 49,270,667
Security and Commodity Brokers, Dealers and Services
Merrill Lynch & Co., Inc.
25,000,000 5.35 02/11/97 24,847,674
25,000,000 5.45 02/19/97 24,814,549
50,000,000 5.33 02/26/97 49,585,444
Morgan Stanley Group, Inc.
22,900,000 5.53\(a)\ 06/27/97 22,900,000
Nomura Holdings
15,000,000 5.39 01/28/97 14,939,363
50,000,000 5.39 01/30/97 49,782,903
- --------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $1,351,989,720
- --------------------------------------------------------------------
Bank Notes--15.1%
Dakota Certificates of Standard Credit Card Master Trust
$ 25,000,000 5.33%\(b)\ 02/07/97 $ 24,863,049
FCC National Bank
25,000,000 5.70 05/22/97 24,971,203
50,000,000 6.00 06/02/97 50,002,020
First Bank FSB
75,000,000 5.61\(b)\ 04/11/97 74,996,012
First National Bank of Maryland
30,000,000 5.61\(b)\ 09/26/97 29,991,409
25,000,000 5.60\(b)\ 09/30/97 24,992,734
Household Bank FSB
25,000,000 5.63\(b)\ 09/23/97 24,998,185
Huntington National Bank
10,000,000 6.05 06/13/97 9,996,458
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Money Market Fund (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Bank Notes (continued)
PNC Bank, N.A.
$ 42,000,000 5.46%(b) 09/03/97 $ 41,977,353
50,000,000 5.40(b) 10/01/97 49,970,608
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
50,000,000 5.45(b) 07/11/97 49,983,901
- --------------------------------------------------------------------
Total Bank Notes $ 446,742,932
- --------------------------------------------------------------------
Certificates of Deposit--1.2%
Chase Manhattan Corp.
$ 35,000,000 5.75% 02/03/97 $ 35,000,000
- --------------------------------------------------------------------
Total Certificates of Deposit $ 35,000,000
- --------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$125,000,000 5.49% 03/18/97 $ 125,002,592
Sanwa Bank Ltd., London
100,000,000 5.46 03/21/97 100,001,079
- --------------------------------------------------------------------
Total Certificates of Deposit - Foreign Eurodollar $ 225,003,671
- --------------------------------------------------------------------
Certificates of Deposit - Yankeedollar--12.3%
Fuji Bank, Chicago
$100,000,000 5.52% 01/17/97 $ 100,000,441
Industrial Bank of Japan, New York
100,000,000 5.46 03/19/97 100,001,051
Landesbank Hessen Thuer Gir, New York
50,000,000 6.03 06/13/97 50,060,885
Sumitomo Bank, Los Angeles
75,000,000 5.52 02/28/97 74,994,514
Westpac Banking Corp., New York
40,000,000 5.97 06/06/97 40,027,198
- --------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 365,084,089
- --------------------------------------------------------------------
Time Deposit--2.9%
Bank of Tokyo, Mitsubishi Bank Ltd., London
$ 85,000,000 5.50% 05/16/97 $ 85,000,000
- --------------------------------------------------------------------
Total Time Deposit $ 85,000,000
- --------------------------------------------------------------------
Repurchase Agreements--15.4%
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $69,839,000, 5.47%, 12/30/97; FHLMC:
$32,517,875, 7.26%, 09/17/01)
$100,000,000 6.50% 01/02/97 $ 100,000,000
SBC Government Securities, Inc., dated 12/31/96, repurchase price
$150,052,083 (FNMA Stripped Securities: $149,437,500, 01/23/97;
FNMA: $3,650,246, 6.50%, 08/15/97)
150,000,000 6.25 01/02/97 150,000,000
Joint Repurchase Agreement Account
205,200,000 6.58 01/02/97 205,200,000
- --------------------------------------------------------------------
Total Repurchase Agreements $ 455,200,000
- --------------------------------------------------------------------
Total Investments $2,964,020,412(c)
================================================================================
(a) Variable rate security - base index is either U.S. Treasury Bill, one or
three month LIBOR, one month commercial paper, Federal Funds or Prime
lending rate
(b) Variable rate master note-base index is Federal Funds.
(c) The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Treasury Obligations Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
=====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Notes
$ 100,000,000 5.63% 06/30/97 $ 99,831,980
30,000,000 6.00 09/02/97 29,991,342
92,500,000 5.38 12/01/97 92,370,356
40,000,000 5.25 12/31/97 39,901,534
- --------------------------------------------------------------------
Total U.S. Treasury Obligations $ 262,095,212
====================================================================
Repurchase Agreements--91.9%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$125,046,875 (U.S. Treasury Notes: $127,384,047, 5.75%-5.88%,
10/31/98-12/31/98)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$101,332,500 (U.S. Treasury Note: $102,491,792, 5.50%,
11/15/98)
100,000,000 5.33 03/13/97 100,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase price
$125,046,528 (U.S. Treasury Bond: $71,136,658, 8.50%,
02/15/20; U.S. Treasury Note: $56,365,266, 7.25%, 08/15/04)
125,000,000 6.70 01/02/97 125,000,000
Daiwa Securities, dated 12/31/96, repurchase price $125,047,917
(U.S. Treasury Bill: $127,500,528, 11/13/97)
125,000,000 6.90 01/02/97 125,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Bill: $127,500,296, 12/11/97)
125,000,000 6.60 01/02/97 125,000,000
JP Morgan Securities, dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Notes: $127,371,815, 6.88%-7.75%,
12/31/99-11/15/01)
125,000,000 6.60 01/02/97 125,000,000
Lehman Government Securities, Inc., dated 12/31/96, repurchase
price $125,049,306 (U.S. Treasury Stripped Securities:
$127,500,543, 02/15/97-11/15/03)
125,000,000 7.10 01/02/97 125,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $125,044,792 (U.S. Treasury Bills:
$70,594,041, 01/09/97-01/30/97; U.S. Treasury Stripped
Securities: $14,626,460, 08/15/98-11/15/99; U.S. Treasury
Notes: $42,283,899, 7.50%-9.25%, 05/15/97-11/15/01)
125,000,000 6.45 01/02/97 125,000,000
Nomura Securities International, Inc., dated 12/12/96, repurchase
price $101,335,000 ( U.S. Treasury Bill: $9,629,890, 09/18/97;
U.S. Treasury Notes: $92,371,056, 5.00%-8.13%, 05/31/97-05/31/01)
100,000,000 5.34 03/12/97 100,000,000
Repurchase Agreements (continued)
Sanwa Securities, dated 12/31/96, repurchase price $125,046,875
(U.S. Treasury Notes: $85,107,798, 4.75%-5.25%,
08/31/98-04/30/01; U.S. Treasury Bill: $40,971,000, 10/16/97)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
Smith Barney, Inc., dated 12/11/96, repurchase price $101,335,000
(U.S. Treasury Bill: $1,475,971, 03/13/97; U.S. Treasury
Stripped Security: $ 15,052,048, 02/15/98; U.S. Treasury
Notes: $85,472,470, 4.75%-7.88%, 02/15/97-04/15/98)
100,000,000 5.34 03/11/97 100,000,000
UBS Securities, Inc., dated 12/31/96, repurchase price
$125,047,743 (U.S. Treasury Notes: $127,294,387, 6.13%-7.75%,
05/31/97-11/15/01)
125,000,000 6.88 01/02/97 125,000,000
Joint Repurchase Agreement Account
1,419,100,000 6.58 01/02/97 1,419,100,000
- --------------------------------------------------------------------
Total Repurchase Agreements $2,844,100,000
====================================================================
Total Investments $3,106,195,212/(a)/
====================================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflects the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Government Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
U.S. Government Agency Obligations--44.7%
Federal Home Loan Bank
$ 35,000,000 5.40%(a) 04/04/97 $ 34,991,708
15,000,000 5.45 11/12/97 14,986,333
20,000,000 5.42 12/02/97 19,973,237
50,000,000 5.50(a) 12/26/97 49,959,182
Federal National Mortgage Association
72,000,000 5.35 01/21/97 71,786,000
25,000,000 5.35 01/24/97 24,914,549
20,000,000 5.27(a) 04/04/97 19,985,729
75,000,000 4.75(a) 04/21/97 74,974,867
100,000,000 5.43(a) 09/12/97 99,940,710
50,000,000 5.41(a) 09/29/97 49,981,540
12,500,000 5.53 10/29/97 12,495,125
75,000,000 5.40(a) 12/03/97 74,952,900
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 548,941,880
- -------------------------------------------------------------------
U.S. Treasury Obligations--6.5%
United States Treasury Notes
$ 50,000,000 5.63% 06/30/97 $ 49,915,080
30,000,000 6.00 09/02/97 29,990,027
- -------------------------------------------------------------------
Total U.S. Treasury Obligations $ 79,905,107
- -------------------------------------------------------------------
Repurchase Agreements--49.0%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$50,018,889 (FNMA: $51,422,558, 7.00%, 12/01/11-04/01/24)
$ 50,000,000 6.80% 01/02/97 $ 50,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase price
$50,671,875 (FHLMC: $52,596,865, 7.00%, 11/01/26)
50,000,000 5.38 03/11/97 50,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$50,671,875 (FNMA: $51,607,046, 6.12%, 10/01/32)
50,000,000 5.38 03/11/97 50,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase price
$50,671,875 (FNMA: $52,512,714, 7.50%, 06/01/26)
50,000,000 5.38 03/12/97 50,000,000
Nomura Securities International, Inc., dated 12/31/96, repurchase
price $50,020,833 (FNMA: $34,860,373, 6.50%, 07/01/24; FHLMC:
$16,396,948, 7.00%-8.00%, 12/01/22-12/01/26)
50,000,000 7.50 01/02/97 50,000,000
Joint Repurchase Agreement Account
351,600,000 6.58 01/02/97 351,600,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 601,600,000
- -------------------------------------------------------------------
Total Investments $1,230,446,987/(b)/
===================================================================
/(a)/Variable rate security-base index is either Federal Funds, Prime
lending rate or one month LIBOR.
/(b)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices.
The percentages shown for each investment category reflect the value
of investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Alabama--4.8%
Columbia IDB PCRB for Alabama Power Co. Series 1995 (A-1/VMIG1)
$ 1,500,000 5.00% 01/01/97 $ 1,500,000
Jefferson County MF Hsg. Refunding RB for Hickory Knolls Project
Series 1994 (Amsouth Bank LOC)(P-1)
4,040,000 4.25 01/07/97 4,040,000
Jefferson County Sewer Revenue Warrants Series 1995 A (Bayerische
Landesbank Girozentrale LOC)(A-1+/VMIG1)
18,200,000 4.25 01/07/97 18,200,000
Parrish IDB PCRB for Alabama Power Co. Series 1994 A(A-1+/VMIG1)
2,150,000 5.00 01/01/97 2,150,000
- -------------------------------------------------------------------
$25,890,000
- -------------------------------------------------------------------
Arizona--1.4%
Maricopa County PCRB for Southern California Edison Co.
Series 1985 C(A-1/P-1)
$ 6,450,000 3.60% 03/12/97 $ 6,450,000
Phoenix IDA MF Hsg. VRDN for Del Mar Terrace Apartments (Bank of
America LOC)(MIG1)
1,300,000 4.15 01/07/97 1,300,000
- -------------------------------------------------------------------
$ 7,750,000
- -------------------------------------------------------------------
Arkansas--0.8%
Crossett City PCRB for Georgia Pacific Corp. Series 1991(Suntrust
Bank LOC)(A-1/P-1)
$ 4,500,000 4.15% 01/07/97 $ 4,500,000
- -------------------------------------------------------------------
California--5.0%
California RANS Index Series 1996-97 B(SP-1+/MIG1)
$16,000,000 3.47% 01/31/97 $16,000,000
California RANS VRDN Series 1996-97(SP-1+/VMIG1)
4,300,000 4.00 01/07/97 4,300,000
California School Cash Reserve Program Authority Series 1996
(MBIA)(MIG1)
4,500,000 4.50 12/19/97 4,537,690
Los Angeles County TRANS Series 1996-97 A(Credit Suisse/Morgan
Guaranty/Westdeutsche Landesbank Girozentrale/Bank of America/
Union Bank of Switzerland LOC)(SP-1/MIG1)
2,080,000 4.50 01/07/97 2,087,107
- -------------------------------------------------------------------
$26,924,797
- -------------------------------------------------------------------
Colorado--1.0%
Colorado Health Facilities Authority Series 1992 C(A-1+/VMIG1)
$ 5,500,000 4.15% 01/07/97 $ 5,500,000
- -------------------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES Series 1988 C (Bayerische
Landesbank Girozentrale LOC)(A-1/VMIG1)
$ 6,100,000 4.10% 01/07/97 $ 6,100,000
- -------------------------------------------------------------------
Florida--4.6%
Dade County Water & Sewer RB Series 1994 (FGIC)(A-1/VMIG1)
$ 3,700,000 4.00% 01/07/97 $ 3,700,000
Florida Local Government Pooled CP Notes (First Union National
Bank of Florida LOC)(A-1/P-1)
11,617,735 3.70 01/30/97 11,617,735
Jacksonville PCRB for Florida Power & Light Co. Series 1995
(A-1+/VMIG1)
600,000 5.25 01/01/97 600,000
Putnam County Development Authority for Seminole Electric Series
1984 H VRDN (CFC)(A-1+/P-1)
9,100,000 4.15 01/07/97 9,100,000
- -------------------------------------------------------------------
$25,017,735
- -------------------------------------------------------------------
Georgia--6.8%
Bartow County PCRB for Georgia Power Co. Series 1996(VMIG1)
$ 5,800,000 5.25% 01/01/97 $ 5,800,000
Burke County PCRB for Georgia Power Co. Second Series 1995
(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
Burke County PCRB for Georgia Power Co. Series 1994(VMIG1)
3,800,000 5.00 01/01/97 3,800,000
Burke County PCRB for Georgia Power Co. Series 1995(A+/VMIG1)
3,400,000 5.00 01/01/97 3,400,000
6,300,000 5.25 01/01/97 6,300,000
Floyd County PCRB for Georgia Power Co. Series 1996(A-1/VMIG1)
3,000,000 5.00 01/01/97 3,000,000
Monroe County Development Authority for Georgia Power Scherer
Project Series 1995(A-1/VMIG1)
3,300,000 5.00 01/01/97 3,300,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series 1985 B(Credit Suisse/Morgan
Guaranty/Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
4,575,000 3.55 03/06/97 4,575,000
6,000,000 3.55 04/10/97 6,000,000
- -------------------------------------------------------------------
$36,975,000
- -------------------------------------------------------------------
Hawaii--0.7%
Hawaii Housing Finance and Development Authority MF Hsg.VRDN
Series 1985 A(FHLB LOC)(A-1+)
$ 4,000,000 3.00% 01/07/97 $ 4,000,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Illinois--8.3%
Illinois Health Facilities Authority VRDN for Elmhurst Memorial
Hospital Series 1993 B(VMIG1)
$ 8,900,000 5.30% 01/01/97 $ 8,900,000
Illinois Health Facilities Authority VRDN for Evangelical
Hospitals Corp. Series 1985 A (First National Bank of Chicago
LOC)(VMIG1)
2,600,000 4.10 01/07/97 2,600,000
Illinois Health Facilities Authority VRDN for Healthcorp
Affiliates Projects Series 1985 A (Northern Trust Company
LOC)(VMIG1)
2,700,000 4.15 01/07/97 2,700,000
Illinois Health Facilities Authority VRDN RB for Northwest
Community Hospital Series 1995 (A-1+/VMIG1)
5,000,000 4.20 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for Resurrection
Healthcare(VMIG1)
6,000,000 5.00 01/01/97 6,000,000
Illinois Health Facilities Authority VRDN Series 1985 C and D
Revolving Fund Pooled Finance Program (First National Bank of
Chicago LOC)(A-1/VMIG1)
16,700,000 4.15 01/07/97 16,700,000
Sauget PCRB VRDN for Monsanto Series 1992(P-1)
1,000,000 4.20 01/07/97 1,000,000
Sauget PCRB VRDN for Monsanto Series 1993(P-1)
1,900,000 4.20 01/07/97 1,900,000
- -------------------------------------------------------------------
$44,800,000
- -------------------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN for Parkview Memorial Hospital
Series 1985 B (Bank of America LOC)(VMIG1)
$ 8,100,000 4.15% 01/07/97 $ 8,100,000
Indiana Hospital Equipment Financing Authority VRDN Series 1985 A
(MBIA)(A-1/VMIG1)
2,500,000 4.20 01/07/97 2,500,000
Jasper County PCRB for Nipsco Series 1994 A and C(A-1+/VMIG1)
9,300,000 5.10 01/01/97 9,300,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
7,475,000 4.15% 01/07/97 7,475,000
- -------------------------------------------------------------------
$27,375,000
- -------------------------------------------------------------------
Iowa--2.0%
Chillicothe PCRB for Midwest Power Systems Series 1993 A
(A-1/VMIG1)
$ 3,700,000 4.15% 01/07/97 $ 3,700,000
Muscatine County VRDN for Monsanto Corp. Series 1992(P-1)
7,200,000 4.20 01/07/97 7,200,000
- -------------------------------------------------------------------
$10,900,000
- -------------------------------------------------------------------
Kentucky--0.6%
Calvert PCRB for Air Products and Chemicals, Inc. Project Series
1993 A(A-1)
$ 3,000,000 4.20% 01/07/97 $ 3,000,000
- -------------------------------------------------------------------
Maryland--2.1%
Anne Arundel County RB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
$ 1,000,000 3.65% 03/10/97 $ 1,000,000
5,380,000 3.60 03/13/97 5,380,000
Baltimore County PCRB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
5,000,000 3.70 01/15/97 5,000,000
- -------------------------------------------------------------------
$11,380,000
- -------------------------------------------------------------------
Massachusetts--0.7%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$ 4,000,000 3.75% 02/28/97 $ 4,002,951
- -------------------------------------------------------------------
Michigan--1.0%
Michigan Job Development Authority VRDN for Mazda Motor
Manufacturing Series 1985 (Sumitomo Bank)(VMIG1)
$ 1,400,000 4.25% 01/07/97 $ 1,400,000
Michigan State Strategic Fund Ltd. RB for Dow Chemical Series 1994
(A-1/P-1)
4,200,000 5.10 01/01/97 4,200,000
- -------------------------------------------------------------------
$ 5,600,000
- -------------------------------------------------------------------
Minnesota--1.9%
Minnesota State Higher Education Facility VRDN for Carleton
College Series 3-L2(VMIG1)
$ 6,000,000 4.11% 01/07/97 $ 6,000,000
Port Authority of St. Paul VRDN for Weyerhauser Project Series 1993
(A-1)
4,000,000 4.21 01/07/97 4,000,000
- -------------------------------------------------------------------
$10,000,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Mississippi--0.6%
Grenada County Refunding RB VRDN for Georgia Pacific Corp. Series
1994 (Sumitomo Bank LOC)(A1/P-1)
$ 1,000,000 4.30% 01/07/97 $ 1,000,000
Jackson County PCRB for Chevron USA, Inc. Series 1992(VMIG1)
2,000,000 5.00 01/01/97 2,000,000
- -------------------------------------------------------------------
$ 3,000,000
- -------------------------------------------------------------------
Missouri--1.1%
Missouri Health & Educational Facility Authority VRDN for SSM
Health Care Series 1995 B (MBIA)(AAA)
$ 4,500,000 4.10% 01/07/97 $ 4,500,000
Missouri State Environmental Improvement & Energy Resources
Authority VRDN for Monsanto Corp. Series 1993(P-1)
1,500,000 4.20 01/07/97 1,500,000
- -------------------------------------------------------------------
$ 6,000,000
- -------------------------------------------------------------------
New Jersey--3.1%
State of New Jersey TRANS Series 1997 A(A-1+/P-1)
$17,000,000 3.50% 03/11/97 $17,000,000
- -------------------------------------------------------------------
New Mexico--0.9%
Albuquerque RB for Sisters of Charity Series 1992(A-1+/VMIG1)
$ 5,000,000 4.15% 01/07/97 $ 5,000,000
- -------------------------------------------------------------------
New York--9.5%
Great Neck North Water Authority Water System RB Series 1993 A
(FGIC)(A-1+/VMIG1)
$ 3,400,000 4.00% 01/07/97 $ 3,400,000
New York City GO Series 1994 B (Morgan Guaranty LOC)(A-1/VMIG1)
2,800,000 4.50 01/01/97 2,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
26,000,000 4.50 04/15/97 26,060,135
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
7,500,000 3.50 03/11/97 7,500,000
New York City Municipal Water Finance Authority RB Series 1995 A
(FGIC)(A-1+/VMIG1)
2,900,000 4.70 01/01/97 2,900,000
New York State Local Government VRDN Series 1995 C (Landesbank
Hessen-Thueringen Girozentrale LOC)(A-1+/VMIG1)
3,900,000 4.00 01/07/97 3,900,000
New York State Local Government VRDN Series 1995 G (National
Westminster Bank LOC)(A-1+/MIG1)
4,550,000 3.85 01/07/97 4,550,000
- -------------------------------------------------------------------
$51,110,135
- -------------------------------------------------------------------
North Carolina--6.8%
Rockingham County PCRB for Philip Morris Company Series
1992(A-1/P-1)
$ 7,700,000 4.15% 01/07/97 $ 7,700,000
Wake County PCRB for Carolina Power & Light Series 1990 A (Fuji
Bank LOC)(A-2/P-1)
18,870,000 3.55 02/10/97 18,870,000
Wake County PCRB for Carolina Power & Light Series 1990 B (Fuji
Bank LOC)(A-2/P-1)
10,000,000 3.75 02/13/97 10,000,000
- -------------------------------------------------------------------
$36,570,000
- -------------------------------------------------------------------
Ohio--2.2%
Columbus Electric System RB Series 1984 (Union Bank of Switzerland
LOC)(VMIG1)
$12,000,000 3.35% 01/31/97 $12,000,000
- -------------------------------------------------------------------
Oregon--1.7%
Portland Public Grain Elevator RB for Columbia Grain, Inc. Series
1984 (Fuji Bank/Bank of Tokyo LOC)(VMIG1)
$ 9,450,000 4.25% 01/07/97 $ 9,450,000
- -------------------------------------------------------------------
Pennsylvania--0.8%
Philadelphia TRANS Series 1996-7 A(SP-1/MIG1)
$ 4,500,000 4.50% 06/30/97 $ 4,511,725
- -------------------------------------------------------------------
Puerto Rico--2.3%
Commonwealth of Puerto Rico TRANS Series 1997 A(SP-1+/MIG1)
$12,500,000 4.00% 07/30/97 $12,540,250
- -------------------------------------------------------------------
South Carolina--1.1%
York County Floating/Fixed Rate PCRB Pooled Series 1984 N, North
Carolina Electric Membership Corp. (CFC)(A-1+/MIG1)
$ 5,775,000 4.15% 01/07/97 $ 5,775,000
- -------------------------------------------------------------------
Tennessee--0.6%
Blount County PCRB for Aluminum Company of America Series 1992
(A-1)
$ 2,450,000 4.15% 01/07/97 $ 2,450,000
Bradley County VRDN for Olin Corp. Series 1993 C (Wachovia Bank of
North Carolina LOC)(A-1+)
600,000 5.25 01/01/97 600,000
- -------------------------------------------------------------------
$ 3,050,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Texas--10.5%
Gulf Coast Waste Disposal Authority PCRB for Monsanto Corp. Series
1996(P-1)
$ 5,300,000 4.20% 01/07/97 $ 5,300,000
Harris County Hospital RB for Children's Hospital Series 1989
B-2(VMIG1)
10,000,000 4.10 01/07/97 10,000,000
Harris County Toll Road Adjustable/Fixed Rate Series 1994 C
(A-1+/VMIG1)
1,500,000 4.05 01/07/97 1,500,000
Houston GO Series A(A-1+/P-1)
5,000,000 3.50 03/12/97 5,000,000
Lower Colorado River Authority CP Notes Series C(A-1/P-1)
7,000,000 3.50 03/13/97 7,000,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
17,700,000 5.00 01/02/97 17,700,000
State of Texas TRANS Series 1996(SP-1+/MIG1)
10,000,000 4.75 08/29/97 10,050,571
- -------------------------------------------------------------------
$56,550,571
- -------------------------------------------------------------------
Virginia--4.6%
Louisa IDA PCRB for Virginia Electric & Power Series 1984(A-1/P-1)
$ 3,900,000 3.65% 01/24/97 $ 3,900,000
1,500,000 3.60 01/29/97 1,500,000
4,000,000 3.60 02/18/97 4,000,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
3,500,000 4.10 01/07/97 3,500,000
York County IDA PCRB for Virginia Electric & Power Series 1985
(A-1/A3)
9,000,000 3.70 01/14/97 9,000,000
2,900,000 3.60 02/05/97 2,900,000
- -------------------------------------------------------------------
$24,800,000
- -------------------------------------------------------------------
Washington--4.4%
Washington Healthcare Facility Authority VRDN for Sisters of
Providence Series 1985 B and E(A-1+/VMIG1)
$ 2,900,000 5.00% 01/01/97 $ 2,900,000
Washington Public Power Supply Project Electric RB Series 1993 A-2
(Bank of America LOC)(A-1/VMIG1)
20,880,000 4.10 01/07/97 20,880,000
- -------------------------------------------------------------------
$23,780,000
- -------------------------------------------------------------------
Wisconsin--1.5%
Milwaukee IDRB Multi-Modal for Pharmacia & Upjohn, Inc. Series
1994(P-1)
$ 8,000,000 4.60% 01/07/97 $ 8,000,000
- -------------------------------------------------------------------
Wyoming--0.3%
Converse County PCRB for Pacificorp. Series 1994(AMBAC)
(A-1/VMIG1)
$ 1,700,000 5.00% 01/01/97 $ 1,700,000
- -------------------------------------------------------------------
Total Investments $540,553,164/(a)/
===================================================================
/(a)/ The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rates indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
================================================================================
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
CFC --Unconditionally guaranteed by CFC, Cooperative Finance Corp.
CP --Commercial Paper
FGIC --Insured by Financial Guaranty Insurance Co.
FHLB --Federal Home Loan Bank
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDRB --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TRANS --Tax Revenue Anticipation Notes
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=======================================================================================
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at value
based on amortized cost $4,373,112,279 $2,964,020,412 $ 3,106,195,212 $1,230,446,987 $540,553,164
Interest receivable 11,583,246 11,328,488 2,442,834 3,375,926 2,193,518
Cash 88,907 53,776 72,630 25,740 160,336
Deferred organization expenses, net -- 21,473 -- -- 39,662
Other assets 107,980 65,537 181,145 117,177 14,269
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 4,384,892,412 2,975,489,686 3,108,891,821 1,233,965,830 542,960,949
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable 23,926,806 16,502,413 12,829,625 5,834,710 1,711,051
Accrued expenses and other liabilities 989,400 969,498 919,263 588,231 164,840
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,916,206 17,471,911 13,748,888 6,422,941 1,875,891
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
Accumulated undistributed net realized
gain (loss) on investments 1,090 954 80,038 26,484 (12,859)
===================================================================================================================================
Net assets $4,359,976,206 $2,958,017,775 $3,095,142,933 $ 1,227,542,889 $541,085,058
===================================================================================================================================
Net asset value, offering and redemption
price per share (net assets/shares
outstanding) $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
FST shares 3,901,792,070 2,540,361,007 2,290,967,452 858,743,905 440,850,118
FST Administration shares 215,900,253 165,764,727 536,903,385 145,103,169 51,661,795
FST Service shares 115,154,059 234,380,537 220,555,465 223,556,901 19,855,446
FST Preferred shares 127,128,734 17,510,550 46,636,593 112,430 28,730,558
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest
outstanding, $0.01 par value
(unlimited number of shares
authorized) 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
==================================================================================
<S> <C> <C> <C> <C> <C>
Investment income:
Interest income $273,607,363 $168,464,120 $ 130,875,226 $69,659,598 $19,750,787
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 3,751,933 2,295,135 1,818,328 961,337 420,548
Account administration fees 6,503,286 3,978,642 3,152,251 1,667,071 728,870
Custodian fees 591,036 401,612 349,064 224,733 31,788
Registration fees 143,509 118,595 229,757 143,620 24,284
Trustee fees 78,242 51,602 31,550 16,933 9,385
Amortization of deferred organization expenses -- 9,065 -- -- 15,626
Other 325,076 181,947 184,245 95,419 59,633
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 11,393,082 7,036,598 5,765,195 3,109,113 1,290,134
Less--Expenses reimbursable and fees
waived by Goldman Sachs (2,388,496) (1,598,929) (1,400,520) (800,866) (302,339)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 9,004,586 5,437,669 4,364,675 2,308,247 987,795
Administration share fees 527,357 474,043 1,100,814 250,618 128,721
Service share fees 541,076 271,936 849,624 1,258,434 91,599
Preferred share fees 42,963 2,874 15,097 395 13,155
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses and share fees 10,115,982 6,186,522 6,330,210 3,817,694 1,221,270
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 263,491,381 162,277,598 124,545,016 65,841,904 18,529,517
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 105,304 189,110 587,091 136,538 (5,995)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $263,596,685 $162,466,708 $125,132,107 $65,978,442 $18,523,522
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 263,491,381 $ 162,277,598 $ 124,545,016 $ 65,841,904 $ 18,529,517
Net realized gain (loss) on
investment transactions 105,304 189,110 587,091 136,538 (5,995)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 263,596,685 162,466,708 125,132,107 65,978,442 18,523,522
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (245,389,523) (149,928,272) (93,857,124) (48,867,861) (15,981,710)
FST Administration shares (10,697,750) (9,558,151) (21,870,105) (5,023,737) (1,593,538)
FST Service shares (5,164,431) (2,628,897) (8,020,699) (11,930,553) (522,532)
FST Preferred shares (2,239,677) (162,278) (797,088) (19,753) (431,737)
Net realized gain on investment transactions
FST shares (128,847) (173,838) (385,734) (81,682) --
FST Administration shares (5,617) (11,082) (89,882) (8,397) --
FST Service shares (2,712) (3,048) (32,963) (19,942) --
FST Preferred shares (1,177) (188) (3,276) (33) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders (263,629,734) (162,465,754) (125,056,871) (65,951,958) (18,529,517)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 48,481,127,400 44,257,102,764 20,383,057,696 14,111,648,633 4,669,259,507
Reinvestment of dividends and
distributions 126,514,648 91,077,089 45,060,831 21,912,928 6,495,873
Cost of shares repurchased (47,756,596,271) (43,600,991,427) (19,343,068,853) (13,746,823,336) (4,623,830,243)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share
transactions 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 851,012,728 747,189,380 1,085,124,910 386,764,709 51,919,142
Net Assets:
Beginning of year 3,508,963,478 2,210,828,395 2,010,018,023 840,778,180 489,165,916
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 4,359,976,206 $2,958,017,775 $ 3,095,142,933 $1,227,542,889 $ 541,085,058
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 247,196,840 $ 136,963,014 $ 79,821,378 $ 38,042,394 $ 13,622,900
Net realized gain (loss) on
investment transactions 95,511 7,374 781,869 65,308 (6,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 247,292,351 136,970,388 80,603,247 38,107,702 13,616,036
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (236,894,656) (130,522,374) (63,729,881) (34,713,840) (12,702,550)
FST Administration shares (7,108,569) (6,351,769) (9,995,927) (2,917,098) (455,025)
FST Service shares (3,193,615) (88,871) (6,095,570) (411,456) (465,325)
Net realized gain on investment transactions
FST shares (55,079) (9,474) (612,499) (59,324) --
FST Administration shares (4,463) (504) (99,062) (5,878) --
FST Service shares (1,830) -- (62,143) (106) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (247,258,212) (136,972,992) (80,595,082) (38,107,702) (13,622,900)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 35,913,627,249 33,159,975,346 12,055,344,504 8,904,113,596 3,459,116,162
Reinvestment of dividends and
distributions 88,104,801 69,894,471 14,492,584 15,345,902 3,954,598
Cost of shares repurchased (35,375,137,049) (31,948,570,256) (11,181,309,002) (8,391,284,391) (3,161,776,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share transactions 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 626,629,140 1,281,296,957 888,536,251 528,175,107 301,287,017
Net Assets:
Beginning of year 2,882,334,338 929,531,438 1,121,481,772 312,603,073 187,878,899
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 3,508,963,478 $ 2,210,828,395 $ 2,010,018,023 $ 840,778,180 $ 489,165,916
====================================================================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 34,469,057,699 31,539,337,948 8,859,672,375 8,279,786,329 3,135,487,639
Reinvestment of dividends and
distributions 85,898,572 66,409,325 11,189,134 14,336,357 3,262,842
Shares repurchased (34,034,050,903) (30,399,518,678) (8,241,356,158) (7,808,586,957) (2,873,945,734)
- ------------------------------------------------------------------------------------------------------------------------------------
520,905,368 1,206,228,595 629,505,351 485,535,729 264,804,747
- ------------------------------------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 721,501,944 1,608,362,145 1,309,118,844 331,435,289 110,334,205
Reinvestment of dividends and
distributions 761,953 3,443,404 845,389 785,525 320,945
Shares repurchased (640,480,667) (1,540,953,481) (1,108,896,222) (304,089,584) (91,758,941)
- ------------------------------------------------------------------------------------------------------------------------------------
81,783,230 70,852,068 201,068,011 28,131,230 18,896,209
- ------------------------------------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 723,067,606 12,275,253 1,886,553,285 292,891,978 213,294,318
Reinvestment of dividends and
distributions 1,444,276 41,742 2,458,061 224,020 370,811
Shares repurchased (700,605,479) (8,098,097) (1,831,056,622) (278,607,850) (196,072,204)
- ------------------------------------------------------------------------------------------------------------------------------------
23,906,403 4,218,898 57,954,724 14,508,148 17,592,925
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in shares 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Financial Square Funds, collectively "the Funds" or individually a "Fund". The
Trust is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. Financial Square consists of seven
diversified funds: Prime Obligations, Money Market, Treasury Obligations,
Government, Tax-Free Money Market , Municipal Money Market (inactive) and Money
Market Plus (inactive). The Financial Square Funds offer four classes of shares:
FST shares, FST Administration shares, FST Service shares and FST Preferred
shares. The investment objective of the Funds is to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
Each Fund uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- -------------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company taxable and tax-exempt income to
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax rules.
Therefore, the source of the Funds' distributions may be shown in the
accompanying financial statements as either from or in excess of net investment
income or net realized gain on investment transactions, or from paid-in capital,
depending on the type of book/tax differences that may exist.
At December 31, 1996, the Funds' tax year end, the Tax-Free Money Market
Fund had approximately $13,000 of capital loss carryforward for U.S. Federal tax
purposes. This capital loss carryforward expires in the year 2004.
D. Deferred Organization Expenses--
- ------------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
E. Expenses--
- --------------
Expenses incurred by the Funds that do not specifically relate to an individual
fund are allocated to the Funds based on each Fund's relative average net assets
for the period.
Shareholders of FST Administration, FST Service and FST Preferred shares
bear all expenses and fees paid to service organizations for their services with
respect to such shares as well as other expenses (subject to expense
limitations) that are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser pursuant to
an Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to general
- --------------------------------------------------------------------------------
19
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
supervision of the Trust's Board of Trustees, manages the portfolios of the
Funds. As compensation for the services rendered under the Investment Advisory
Agreement and the assumption of the expenses related thereto, GSAM is entitled
to a fee, computed daily and payable monthly, at an annual rate equal to .075%
of each Fund's average daily net assets. These amounts are included in "Accrued
expenses and other liabilities" in the accompanying Statements of Assets and
Liabilities.
Until further notice, GSAM has voluntarily agreed to limit certain of each
of the Fund's expenses (excluding advisory fees, account administration fees,
service organization fees, taxes, interest, brokerage commissions and
extraordinary expenses) to the extent that such expenses exceed .01% per annum
of that Fund's average daily net assets. These amounts are included in "Other
assets" in the accompanying Statements of Assets and Liabilities.
GSAM also serves as administrator pursuant to an Administration Agreement.
Under the Administration Agreement, GSAM administers each Fund's business
affairs, including providing facilities and transfer agency services. As
compensation for the services rendered under the Administration Agreement, GSAM
is entitled to a fee, computed daily and payable monthly, at an annual rate
equal to .13% of each Fund's average daily net assets. These amounts are
included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and receives no fee. The following chart outlines the
waivers and reimbursements for the year ended December 31, 1996 and amounts owed
to affiliates and due from GSAM at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Adviser Expense Amounts Amounts
Fee Reimburs- due to due from
Fund Waived ements Total GSAM GSAM
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime
Obligations
Fund $1,751 $637 $2,388 $777 $108
- ---------------------------------------------------------------------
Money
Market
Fund 1,142 457 1,599 552 65
- ---------------------------------------------------------------------
Treasury
Obligations
Fund 848 553 1,401 419 155
- ---------------------------------------------------------------------
Government
Fund 449 352 801 197 117
- ---------------------------------------------------------------------
Tax-Free
Money
Market
Fund 217 85 302 86 13
- ---------------------------------------------------------------------
</TABLE>
4. Administration, Service and Preferred Plans
The Funds have adopted Administration, Service and Preferred Plans to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration, Service and Preferred Plans provide for
compensation to the service organizations in an amount up to .25% , .50% and
.10% (on an annualized basis), respectively, of the average daily net asset
value of the respective shares.
5. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended December
31, 1996, the Funds did not have any borrowings under this facility.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Fund's custodian.
7. Joint Repurchase Agreement Accounts
The Funds, together with other registered investment companies having advisory
agreements with GSAM or its affiliates, transfer uninvested cash balances into
joint accounts, the daily aggregate balances of which are invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations.
At December 31, 1996, the Prime Obligations, Money Market, Treasury
Obligations and Government Funds had undivided interests in the repurchase
agreements in the following joint account, which equaled $297,900,000,
$205,200,000, $1,419,100,000 and $351,600,000 in principal amount, respectively.
At December 31, 1996, the repurchase agreements in this joint account, along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date), were as follows:
- --------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$ 200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933 (U.S.
Treasury Notes: $129,531,177, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- --------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
==========================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Fund may enter into certain
principal transactions, including repurchase agreements, with Goldman, Sachs &
Co. subject to certain limitations as follows: 25% of eligible security
transactions, as defined, and 10% of repurchase agreement transactions.
21
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
9. Summary of Share Transactions
Share activity for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Tax-Free
Prime Obligations Money Market Treasury Government Money Market
Fund Fund Obligations Fund Fund Fund
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FST Shares:
Shares sold 44,941,258,260 41,611,799,874 15,303,462,361 11,674,849,553 4,186,677,890
Reinvestment of dividends and
distributions 120,569,689 84,724,371 33,617,264 19,640,980 4,879,667
Shares repurchased (44,455,790,432) (41,225,360,339) (14,633,812,470) (11,579,631,835) (4,199,081,918)
------------------------------------------------------------------------------------------------
606,037,517 471,163,906 703,267,155 114,858,698 (7,524,361)
FST Administration Shares:
Shares sold 1,718,885,581 2,097,089,351 2,868,056,191 1,074,614,378 177,906,627
Reinvestment of dividends and
distributions 2,721,453 5,879,304 4,640,302 1,055,828 844,377
Shares repurchased (1,653,602,695) (2,074,616,324) (2,618,986,546) (1,012,951,862) (148,027,716)
------------------------------------------------------------------------------------------------
68,004,339 28,352,331 253,709,947 62,718,344 30,723,288
FST Service Shares:
Shares sold 1,442,987,405 470,852,368 2,117,230,142 1,353,982,373 239,131,409
Reinvestment of dividends and
distributions 3,217,249 397,187 6,330,034 1,208,640 449,321
Shares repurchased (1,396,329,467) (241,087,916) (2,042,124,197) (1,146,142,260) (239,585,078)
------------------------------------------------------------------------------------------------
49,875,187 230,161,639 81,435,979 209,048,753 (4,348)
FST Preferred Shares:
Shares sold 377,996,154 77,361,171 94,309,002 8,202,329 65,543,581
Reinvestment of dividends and
distributions 6,257 76,227 473,231 7,480 322,508
Shares repurchased (250,873,677) (59,926,848) (48,145,640) (8,097,379) (37,135,531)
------------------------------------------------------------------------------------------------
127,128,734 17,510,550 46,636,593 112,430 28,730,558
------------------------------------------------------------------------------------------------
Net increase in shares 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Ratio of net
Net asset Net realized Total Net asset expenses to
value at Net gain income from Distributions value at average
beginning investment on investment investment to end Total net
of period income transactions operations shareholders of period return(a) assets
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0529 $-- $0.0529 $(0.0529) $1.00 5.41% 0.18%
1996-FST Preferred shares/(c)/... 1.00 0.0346 -- 0.0346 (0.0346) 1.00 5.28/(b)/ 0.28/(b)/
1996-FST Administration shares .. 1.00 0.0506 -- 0.0506 (0.0506) 1.00 5.14 0.43
1996-FST Service shares ......... 1.00 0.0478 -- 0.0478 (0.0478) 1.00 4.88 0.68
1995-FST shares ................. 1.00 0.0586 -- 0.0586 (0.0586) 1.00 6.02 0.18
1995-FST Administration shares .. 1.00 0.0559 -- 0.0559 (0.0559) 1.00 5.75 0.43
1995-FST Service shares ......... 1.00 0.0533 -- 0.0533 (0.0533) 1.00 5.49 0.68
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.38/(b)/ 0.18/(b)/
1994-FST Administration shares/(d)/ 1.00 0.0383 -- 0.0383 (0.0383) 1.00 4.12/(b)/ 0.43/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.86/(b)/ 0.68/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0311 0.0002 0.0313 (0.0313) 1.00 3.18 0.17
1994-FST Administration shares .. 1.00 0.0286 0.0002 0.0288 (0.0288) 1.00 2.92 0.42
1994-FST Service shares ......... 1.00 0.0261 0.0002 0.0263 (0.0263) 1.00 2.66 0.67
1993-FST shares ................. 1.00 0.0360 0.0007 0.0367 (0.0367) 1.00 3.75 0.18
1993-FST Administration shares/(e)/ 1.00 0.0068 0.0001 0.0069 (0.0069) 1.00 3.02/(b)/ 0.44/(b)/
1993-FST Service shares ......... 1.00 0.0301 0.0007 0.0308 (0.0308) 1.00 3.23 0.68
1992-FST shares ................. 1.00 0.0572 0.0002 0.0574 (0.0574) 1.00 5.99 0.18
1992-FST Service shares (e)...... 1.00 0.0027 -- 0.0027 (0.0027) 1.00 4.10/(b)/ 0.66/(b)/
For the Period March 8, 1990 (f)
- --------------------------------
through January 31,
- -------------------
1991-FST shares ................. 1.00 0.0727 -- 0.0727 (0.0727) 1.00 8.27/(b)/ 0.18/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Net Ratio of net
assets at Ratio of investment
end expenses to income to
of period average net average net
(in 000's) assets assets
----------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $3,901,797 0.23% 5.24%
1996-FST Preferred shares/(c)/... 127,126 0.33/(b)/ 5.14/(b)/
1996-FST Administration shares .. 215,898 0.48 5.01
1996-FST Service shares ......... 115,154 0.73 4.73
1995-FST shares ................. 3,295,791 0.22 5.82
1995-FST Administration shares .. 147,894 0.47 5.55
1995-FST Service shares ......... 65,278 0.72 5.29
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 2,774,849 0.24/(b)/ 4.32/(b)/
1994-FST Administration shares/(d)/ 66,113 0.49/(b)/ 4.12/(b)/
1994-FST Service shares/(d)/..... 41,372 0.74/(b)/ 3.92/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1,831,413 0.25 3.03
1994-FST Administration shares .. 35,250 0.50 2.78
1994-FST Service shares ......... 14,001 0.75 2.53
1993-FST shares ................. 813,126 0.25 3.53
1993-FST Administration shares/(e)/ 1,124 0.52/(b)/ 2.88/(b)/
1993-FST Service shares ......... 336 0.75 2.94
1992-FST shares ................. 917,073 0.27 5.63
1992-FST Service shares/(e)/..... 118 0.74/(b)/ 4.02/(b)/
For the Period March 8, 1990/(f)/
- ---------------------------------
through January 31,
- -------------------
1991-FST shares ................. 578,495 0.28/(b)/ 7.94/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration share and FST Service share activity commenced during
November of 1992 and January of 1992, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=================================
Net Asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end
of period income transactions operations shareholders of period
=========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares ................. $1.00 $0.0533 $0.0001 $0.0534 $(0.0534) $1.00
1996-FST Preferred shares/(c)/... 1.00 0.0348 -- 0.0348 (0.0348) 1.00
1996-FST Administration shares .. 1.00 0.0504 0.0001 0.0505 (0.0505) 1.00
1996-FST Service shares ......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995-FST shares ................. 1.00 0.0589 -- 0.0589 (0.0589) 1.00
1995-FST Administration shares .. 1.00 0.0561 -- 0.0561 (0.0561) 1.00
1995-FST Service shares/(d)/..... 1.00 0.0231 -- 0.0231 (0.0231) 1.00
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 1.00 0.0305 -- 0.0305 (0.0305) 1.00
1994-FST Administration shares
/(d)/......................... 1.00 0.0298 -- 0.0298 (0.0298) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
Total average net average net of period average net average net
return/(a)/ assets assets (in 000's) assets assets
==========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares.................. 5.45% 0.18% 5.33% $2,540,366 0.23% 5.28%
1996-FST Preferred shares/(c)/... 5.31/(b)/ 0.28/(b)/ 5.23/(b)/ 17,510 0.33/(b)/ 5.18/(b)/
1996-FST Administration shares... 5.19 0.43 5.04 165,766 0.48 4.99
1996-FST Service shares.......... 4.93 0.68 4.84 234,376 0.73 4.79
1995-FST shares................. 6.07 0.15 5.89 2,069,197 0.23 5.81
1995-FST Adminstration shares.... 5.80 0.40 5.61 137,412 0.48 5.53
1995-FST Services shares/(d)/.... 5.41/(b)/ 0.65/(b)/ 4.93/(b)/ 4,219 0.73/(b)/ 4.85/(b)/
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 4.91/(b)/ 0.11/(b)/ 4.88/(b)/ 862,971 0.25/(b)/ 4.74/(b)/
1994-FST Adminstration shares/(d)/ 4.65/(b)/ 0.36/(b)/ 4.82/(b)/ 66,560 0.50/(b)/ 4.68/(b)/
</TABLE>
- ------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST, FST Adminstration and FST Service share activity commenced May 18,
1994, May 20, 1994 and July 14, 1995, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain (loss) from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0522 $0.0003 $0.0525 $(0.0524) $1.00 5.35%
1996-FST Preferred shares/(c)/... 1.00 0.0342 0.0001 0.0343 (0.0343) 1.00 5.24/(b)/
1996-FST Administration shares .. 1.00 0.0497 0.0002 0.0499 (0.0498) 1.00 5.09
1996-FST Service shares ......... 1.00 0.0472 0.0002 0.0474 (0.0474) 1.00 4.83
1995-FST shares ................. 1.00 0.0573 0.0005 0.0578 (0.0578) 1.00 5.96
1995-FST Administration shares .. 1.00 0.0547 0.0005 0.0552 (0.0552) 1.00 5.69
1995-FST Service shares ......... 1.00 0.0521 0.0005 0.0526 (0.0526) 1.00 5.43
For the Year Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 1.00 0.0379 (0.0001) 0.0378 (0.0378) 1.00 4.23/(b)/
1994-FST Administration shares
/(d)/.......................... 1.00 0.0388 (0.0001) 0.0387 (0.0387) 1.00 3.97/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0349 (0.0001) 0.0348 (0.0348) 1.00 3.71/(b)/
For the Year Ended December 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0301 0.0007 0.0308 (0.0307) 1.00 3.11
1994-FST Administration shares .. 1.00 0.0276 0.0006 0.0282 (0.0281) 1.00 2.85
1994-FST Service shares ......... 1.00 0.0251 0.0008 0.0259 (0.0256) 1.00 2.60
1993-FST shares ................. 1.00 0.0342 0.0012 0.0354 (0.0355) 1.00 3.69
1993-FST Administration shares
/(e)/.......................... 1.00 0.0009 -- 0.0009 (0.0009) 1.00 2.83/(b)/
1993-FST Service shares ......... 1.00 0.0296 0.0016 0.0312 (0.0309) 1.00 3.17
1992-FST shares ................. 1.00 0.0549 0.0015 0.0564 (0.0561) 1.00 5.84
1992-FST Service shares/(e)/..... 1.00 0.0113 0.0006 0.0119 (0.0116) 1.00 4.47/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -------------------------------------------
1991-FST shares ................. 1.00 0.0600 0.0006 0.0606 (0.0605) 1.00 8.06/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.22% $2,291,051 0.24% 5.16%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.11/(b)/ 46,637 0.34/(b)/ 5.05/(b)/
1996-FST Administration shares .. 0.43 4.97 536,895 0.49 4.91
1996-FST Service shares ......... 0.68 4.72 220,560 0.74 4.66
1995-FST shares ................. 0.18 5.73 1,587,715 0.23 5.68
1995-FST Administration shares .. 0.43 5.47 283,186 0.48 5.42
1995-FST Service shares ......... 0.68 5.21 139,117 0.73 5.16
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 0.18/(b)/ 4.13/(b)/ 958,196 0.25/(b)/ 4.06/(b)/
1994-FST Administration shares
/(d)/.......................... 0.43/(b)/ 4.24/(b)/ 82,124 0.50/(b)/ 4.17/(b)/
1994-FST Service shares/(d)/..... 0.68/(b)/ 3.82/(b)/ 81,162 0.75/(b)/ 3.75/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 0.17 3.01 812,420 0.24 2.94
1994-FST Administration shares .. 0.42 2.76 24,485 0.49 2.69
1994-FST Service shares ......... 0.67 2.51 35,656 0.74 2.44
1993-FST shares ................. 0.18 3.42 776,181 0.26 3.34
1993-FST Administration shares
/(e)/.......................... 0.43/(b)/ 2.83/(b)/ 1 0.51/(b)/ 2.75/(b)/
1993-FST Service shares ......... 0.68 2.96 5,155 0.76 2.88
1992-FST shares ................. 0.18 5.49 413,171 0.28 5.39
1992-FST Service shares/(e)/..... 0.68/(b)/ 3.77/(b)/ 3,634 0.78/(b)/ 3.67/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -----------------------------------
1991-FST shares ................. 0.21/(b)/ 7.74/(b)/ 229,988 0.34/(b)/ 7.61/(b)/
- ----------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration and FST Service share activity commenced during January
of 1993 and October of 1991, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0525 $0.0001 $0.0526 $(0.0526) $1.00 5.38%
1996-FST Preferred shares/(c)/... 1.00 0.0344 0.0001 0.0345 (0.0345) 1.00 5.26/(b)/
1996-FST Administration shares .. 1.00 0.0501 0.0001 0.0502 (0.0502) 1.00 5.12
1996-FST Service shares ......... 1.00 0.0474 0.0001 0.0475 (0.0475) 1.00 4.86
1995-FST shares ................. 1.00 0.0581 0.0001 0.0582 (0.0582) 1.00 6.00
1995-FST Administration shares .. 1.00 0.0554 0.0001 0.0555 (0.0555) 1.00 5.74
1995-FST Service shares/(d)/..... 1.00 0.0320 -- 0.0320 (0.0320) 1.00 5.40/(b)/
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(e)/............. 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.36/(b)/
1994-FST Administration shares
/(e)/.......................... 1.00 0.0426 -- 0.0426 (0.0426) 1.00 4.10/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 1.00 0.0256 0.0001 0.0257 (0.0257) 1.00 3.14/(b)/
1993-FST Administration shares
/(d)/.......................... 1.00 0.0120 0.0001 0.0121 (0.0121) 1.00 2.87/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.25% $858,769 0.24% 5.19%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.14/(b)/ 112 0.34/(b)/ 5.08/(b)/
1996-FST Administration shares .. 0.43 5.01 145,108 0.49 4.95
1996-FST Service shares ......... 0.68 4.74 223,554 0.74 4.68
1995-FST shares ................. 0.18 5.81 743,884 0.24 5.75
1995-FST Administration shares .. 0.43 5.54 82,386 0.49 5.48
1995-FST Service shares/(d)/..... 0.68/(b)/ 5.08/(b)/ 14,508 0.74/(b)/ 5.02/(b)/
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(e)/............. 0.15/(b)/ 4.64/(b)/ 258,350 0.25/(b)/ 4.54/(b)/
1994-FST Administration shares
/(e)/.......................... 0.40/(b)/ 4.67/(b)/ 54,253 0.50/(b)/ 4.57/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 0.08/(b)/ 3.10/(b)/ 44,697 0.59/(b)/ 2.59/(b)/
1993-FST Administration shares
/(d)/.......................... 0.35/(b)/ 2.85/(b)/ 14,126 0.76/(b)/ 2.44/(b)/
- ---------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced April 6, 1993, September 1, 1993 and May 16, 1995, respectively.
/(e)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations shareholders period return /(a)/
===========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... $1.00 $0.0335 -- $0.0335 $(0.0335) $1.00 3.39%
1996-FST Preferred shares /(c)/....... 1.00 0.0218 -- 0.0218 (0.0218) 1.00 3.30/(b)/
1996-FST Administration shares ....... 1.00 0.0310 -- 0.0310 (0.0310) 1.00 3.13
1996-FST Service shares .............. 1.00 0.0285 -- 0.0285 (0.0285) 1.00 2.88
1995-FST shares ...................... 1.00 0.0381 -- 0.0381 (0.0381) 1.00 3.89
1995-FST Administration shares ....... 1.00 0.0354 -- 0.0354 (0.0354) 1.00 3.63
1995-FST Service shares .............. 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.38
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 1.00 0.0156 -- 0.0156 (0.0156) 1.00 3.41/(b)/
1994-FST Administration shares /(d)/.. 1.00 0.0136 -- 0.0136 (0.0136) 1.00 3.19/(b)/
1994-FST Service shares /(d)/......... 1.00 0.0091 -- 0.0091 (0.0091) 1.00 3.11/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... 0.18% 3.35% $440,838 0.23% 3.30%
1996-FST Preferred shares /(c)/....... 0.28/(b)/ 3.26/(b)/ 28,731 0.33/(b)/ 3.21/(b)/
1996-FST Administration shares ....... 0.43 3.10 51,661 0.48 3.05
1996-FST Service shares .............. 0.68 2.85 19,855 0.73 2.80
1995-FST shares ...................... 0.14 3.81 448,367 0.24 3.71
1995-FST Administration shares ....... 0.39 3.54 20,939 0.49 3.44
1995-FST Service shares .............. 0.64 3.32 19,860 0.74 3.22
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 0.07/(b)/ 3.42/(b)/ 183,570 0.31/(b)/ 3.18/(b)/
1994-FST Administration shares /(d)/.. 0.32/(b)/ 3.25/(b)/ 2,042 0.56/(b)/ 3.01/(b)/
1994-FST Service shares /(d)/......... 0.57/(b)/ 3.32/(b)/ 2,267 0.81/(b)/ 3.08/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced July 19, 1994, August 1, 1994 and September 23, 1994,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Money Market
Trust--Financial Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Money Market Trust--Financial Square Funds (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds), including the
statements of investments, as of December 31, 1996, and the related statements
of operations, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Financial Square Funds as of December 31, 1996, the results of
their operations and the changes in their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- ------------------------------------- ---------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- -----------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--Financial
Square Funds Prospectus which contains facts concerning each Fund's objectives
and policies, management, expenses and other information.
- --------------------------------------------------------------------------------
31
<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.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered a super-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories. The
modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
- --------------------------------------------------------------------------------
* 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 often be evidenced
by many of the following charac teristics:
. Leading market positions in well established indus tries.
. 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/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand feature-
variable rate demand obligation. Such ratings will be designated as VMIG to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors
A-2
<PAGE>
should be alert to the fact that the source of payment may be limited to the
external liquidity with no or limited legal recourse to the issuer in the event
the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the addition of
a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more suscep tible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
Municipal Notes
- ---------------
A Standard & Poor's note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
A-3
<PAGE>
. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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: The highest credit quality. The risk factors are negligi ble, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and - in the AA and A catego ries for long-
term fixed securities. The modifier + indicates that the security ranks in the
higher end of the category; the modifier AA or A indicates a mid-range ranking;
and the modifier - indicates that the issue ranks in the lower end of the
category.
A-4
<PAGE>
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 requirements, access to capital markets is good and risk factors
are small.
Duff & Phelps applies a plus and minus rating scale, D-1+, D-1 and D-1- in the
Duff 1 top grade category for short-term debt. The rating D-1+ indicates that
the security has the highest certainty of timely payment, short-term liquidity
is clearly 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 fore-
seeable future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds which are rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA- .
A-5
<PAGE>
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very strong
credit quality. Those issues determined to possess exceptionally strong credit
quality and having the strongest degree of assurance for timely payment will be
denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good credit
quality. Issues assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity for
timely repayment. Where issues possess a particu larly strong credit feature a
rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfac tory 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 an extremely high ability to repay
principal and interest on a timely basis.
AA:The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal and
interest is strong. Issuer rated A could be more vulnerable to adverse
developments (both internal an external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
A-6
<PAGE>
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
A-7
<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"), 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 Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, 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
personal computer software system which allows
<PAGE>
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 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
<TABLE>
<CAPTION>
Page in
Statement of
Additional
Information
------------
<S> <C>
Investment Policies and Practices of the Funds.. 4
Investment Limitations.......................... 17
Trustees and Officers........................... 22
The Adviser, Distributor
and Transfer Agent............................. 28
Portfolio Transactions.......................... 33
Net Asset Value................................. 35
Redemptions..................................... 37
Calculation of Yield Quotations................. 38
Tax Information................................. 42
Organization and Capitalization................. 47
Custodian and Subcustodian...................... 52
Independent Accountants......................... 52
Financial Statements............................ 52
Administration Plan............................. 53
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 guaran-
tee 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 enter into repurchase
agreements only with primary dealers in U.S. Government Securities. A
repurchase agreement is an arrangement under which the purchaser (i.e., the
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 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, install-
ment 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, a Fund 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 Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets
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 any net capital gains
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
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<PAGE>
maintain in a segregated account cash or liquid assets 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
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<PAGE>
be eligible for purchase by a Fund, a variable or floating rate 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 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
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<PAGE>
Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board of Trustees, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance 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
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such custodial receipts are excluded from gross income for 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
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<PAGE>
industrial user. Tax-Free Fund does not intend to invest in 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 finan-
cial 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
14
<PAGE>
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 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
15
<PAGE>
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 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,
16
<PAGE>
the policy of each Fund that may enter into such 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 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 (except for Government
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 the 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 and 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 such 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 that (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through re verse repurchase agreements in
amounts up to 33/1/3/% of its total assets (including the amount borrowed),
(b) the Fund may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes, (c) the Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of port-
18
<PAGE>
folio securities, and (d) the Fund may purchase securities on margin to the
extent permitted by applicable law.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each 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 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.
Government Fund may not:
(1) with respect to 75% of its total assets taken at market value, invest more
than 5% of the value of the total assets of that Fund in the securities of any
one issuer, except U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. This restriction does not,
however, apply to any Fund classified as a non-diversified company under the
Investment Company Act;
(2) with respect to 75% of its total assets taken at market value, purchase the
securities of any one issuer if, as a result of such purchase, that Fund would
hold more than 10% of the outstanding voting securities of that issuer. This
restriction does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act;
(3) borrow money, except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowings and that no purchases of securities will be made if
such borrowings exceed 5% of the value of the Fund's assets. This restriction
does not apply to cash collateral received as a result of portfolio securities
lending;
19
<PAGE>
(4) mortgage, pledge or hypothecate its assets except to secure permitted
borrowings;
(5) act as underwriter of the securities issued by others, except to the extent
that the purchase of securities in accordance with a Fund's investment
objective and policies directly from the issuer thereof and the later
disposition thereof may be deemed to be underwriting;
(6) purchase securities if such purchase would cause more than 25% 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, provided that there is no limitation with respect to, and
the Fund reserves freedom of action, when otherwise consistent with its
investment policies to, concentrate its investments in, U.S. Government
securities, obligations (other than commercial paper) issued or guaranteed by
U.S. banks, and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by U.S. Government securities or such bank
obligations. (For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be industries,
and 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.
Such concentration may be effected when the Adviser determines that risk
adjusted returns in such industries are considered favorable relative to other
industries.)
(7) issue senior securities, except as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust;
(8) purchase or sell real estate (excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodities contracts. The Trust reserves the freedom to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities;
(9) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and entry into
repurchase agreements in accordance with such Fund's investment objective and
policies may be deemed to be loans;
(10) purchase securities on margin (except for delayed delivery or when-issued
transactions or such short-term credits as are necessary for the clearance of
transactions), make short sales of securities, maintain a short position, or
invest in or write puts, calls or combinations thereof (except that a Fund may
20
<PAGE>
acquire puts in connection with the acquisition of a debt instrument);
(11) invest in other companies for the purpose of exercising control or
management.
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.
As money market funds, the Funds 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 Fund's portfolio may not exceed
397 days and a Fund'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 Fund, other
than the Tax-Exempt Funds, as a matter of non-funda mental policy only invests
in First Tier securities. Portfolio diversification. The Prime Obligations,
Money Market Plus, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Free Money Market Funds may not invest more than
5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such
21
<PAGE>
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. 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 Fund , no more than 10%
of the Fund'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 Funds (which are
the only Funds that may 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 Funds' total assets may be invested in securities or puts issued by
the institution that issued the put. The Tax-Exempt Fund's investment in Second
Tier securities that are conduit securities, which are municipal securities
involving an agreement or arrangement providing for payment by a person other
than the issuer of the municipal security, that are not subject to an
unconditional demand feature, may not exceed 5% of the Fund's total assets and
the Fund's investment in such conduit securities issued by any issuer may not
exceed 1% of the Fund's total assets. Securities which are rated in the highest
short-term rating category by at least two Nationally Recognized Statistical
Rating Organizations ("NRSROs"), or if only one NRSRO has assigned a rating, by
that NRSRO, are "First Tier Securities". Securities rated in the top two short-
term rating categories by at least two NRSROs, but which are not First Tier
Securities are "Second Tier Securities." NRSROs include S&P, Moody's, Fitch
Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thomson BankWatch, Inc. For a description of their rating
categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a 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.
22
<PAGE>
<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); Senior
Vice President of Scott Paper Company
until June 1994; Director of Arkwright
Mutual Insurance Company; Trustee of
International House of Philadelphia;
Member of Cornell University Council;
Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-1996); Co-
Head of GSAM (since December 1994).
*Douglas C. Grip, 35 Trustee & Vice President, Goldman Sachs
One New York Plaza President (since May 1996); President, MFS
New York, NY 10004 Retirement Services Inc., of Massachu-
setts Financial Services (prior
thereto).
*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);
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
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
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).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza Commonwealth, Inc. (a managed dental
#218 care company, (since January 1996);
Northfield, IL 60093 Chairman and Chief Executive Officer,
MSP Communications Inc. (a company
engaged in radio broadcasting) (since
November 1988); Director, Federal
Express Corporation (since 1976),
Evanston Hospital Corporation (since
1980), First Commonwealth, Inc. (since
1988) and North American Private Equity
Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer of Ameritech (a
Lake Forest, IL 60045 telecommunications holding
company,(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug
store business); Director of Baker,
Fentress & Co. (a closed-end, management
investment company.
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. (since 1990); President and Chief
Suite 1400 Executive Officer, Microdot, Inc.
Chicago, IL 60602 (a diversified manufacturer of fastening
systems and
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ---------- -----------------------------
<S> <C> <C>
connectors)(January 1984 to
October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza GSAM (since April 1994); Assistant
New York, NY 10004 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 Investors Bank and Trust
10004 Company (November 1993 to July 1995); Audit
Manager of Arthur Andersen LLP (prior
thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since
4900 Sears Tower President June 1992); Director, Shareholder Servicing
Chicago, IL of GSAM (since June 1992).
60606
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL November 1989).
60606
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY Vice President and Assistant
10004 General Counsel of Goldman
Sachs (since June 1992);
Counsel to the Funds Group,
GSAM (since June 1992);
Partner, Hale and Dorr (Sep-
tember 1991 to June 1992).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Howard B. Surloff, 31 Assistant Assistant General Counsel and
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, GSAM (since November 1993); Asso-
ciate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since March
1997); Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, Assistant Legal Products Analyst,
33 Secretary Goldman Sachs (June 1993 to
85 Broad Street present); Funds Compliance
New York, NY 10004 Officer, Citibank Global Asset
Management (August 1991 to June 1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM (since 1988).
New York, NY 10004
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (since 1995-1996); 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 1,
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.
26
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman 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.** $28,050 $0 $62,450
Ashok N. Bakhru $35,126 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $29,198 $0 $58,954
William H. Springer $29,198 $0 $58,954
Richard P. Strubel $29,198 $0 $58,594
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including
the five Funds in existence on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
27
<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 certain
other expenses (excluding management fees, fees payable to Service
Organizations, 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 a
portion of its management fee.
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 Funds' custodian, fees and
expenses of the Funds' transfer agent, filing fees for the registration or
qualification of shares under federal or state securities laws, expenses of the
organization of the Funds, 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 Funds 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, their proportionate share of the compensation and
expenses of the Trust's "non-interested" Trustees, and extraordinary expenses
incurred by the Funds.
28
<PAGE>
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory and administration agreements. Effective May 1, 1997 the services
under such agreements were combined in the Management Agreement. The services
required to be performed for the Funds and the combined advisory and
administration fees payable by the Funds under the former advisory and
administration agreements are identical to the services and fees under the
Management Agreement. For the fiscal years ended December 31, 1996 and December
31, 1995 and the eleven months ended December 31, 1994 the amounts of the
management fee (including both advisory and administration fees) incurred by
each Fund were as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
----------- ----------- -----------
<S> <C> <C> <C>
Prime Obligations Fund $8,504,328 $7,194,392 $3,485,286
Money Market Fund/(1)/ 5,131,644 3,236,027 900,121
Treasury Obligations Fund 4,121,944 2,401,903 1,186,773
Government Fund 2,179,655 1,119,731 243,841
Tax-Free Money Market Fund/(2)/ 930,176 459,413 35,436
- ------------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ Commenced operations July 19, 1994.
GSAM has agreed that it will not impose a portion of its manage ment fee. Had
such fees been imposed, the following additional fees (including both advisory
and administration fees) would have been incurred by these Funds for the periods
indicated:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Fund $1,750,891 $3,173,924 $1,609,383
Money Market Fund/(1)/ 1,142,133 1,063,477 482,154
Treasury Obligations Fund 848,635 1,747,326 554,447
Government Fund 448,753 493,804 159,290
Tax-Free Money Market Fund/(2)/ 219,242 304,151 109,909
- ---------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ 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 Funds' shareholders approved the Management Agreement on April 21,
1997. The Manage ment 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 Fund (as defined
in the Investment Company Act) and, in either case, by a majority of "non-
interested" Trustees.
29
<PAGE>
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.
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 Funds would have incurred the following additional expenses:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Prime Obligations Fund $637,605 $382,318 $ -0-
Money Market Fund 456,796 420,234 N/A
Treasury Obligations 551,885 280,395 -0-
Government Fund 352,113 197,008 98,125
Tax-Free Money Market Fund 83,097 83,376 N/A
- --------------------------
</TABLE>
Each Fund may use any name derived from the name "Goldman Sachs" only as long as
its Management Agreement remains in effect. The 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 60 days' written notice to the Trust.
In managing the Tax-Free Money Market and Municipal Money Market Funds, 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 adminis trative and economic
characteristics.
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 with the Funds.
30
<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 29, 1996, Goldman Sachs
and its consolidated subsidiaries had assets of approximately $152 billion and
partners' capital of $5.2 billion. Goldman Sachs became registered as an
investment adviser in 1981. As of March 24, 1997, Goldman Sachs, together with
its affiliates, acted as investment adviser, administrator or distributor for
approximately $104.9 billion in total assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
- ----------------------------------------------------------------------------
GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and their
- -------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the Adviser and
its advisory affiliates have proprietary inter ests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed-income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds invest, which could
have an adverse impact on each Fund's performance. Such transactions,
particularly in respect of proprietary accounts or customer accounts other than
those included in the Adviser's and its advisory affiliates' asset management
activities, will be execut ed independently of the Funds' transactions and thus
at prices or rates that may be more or less favorable. When the Adviser and its
advisory affiliates seek to purchase or sell the same assets for their managed
accounts, including the Funds, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be peri-
31
<PAGE>
ods, for example, when the Adviser, and/or its affiliates, will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which, or in securities of issuers for which, the Adviser and/or
its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Funds, the Adviser may have access to
certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. The Adviser will not be under any
obligation, however, to effect transactions on behalf of the 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 propri
etary activities or portfolio strategies of Goldman Sachs and its affiliates or
the activities or strategies used for accounts managed by them or other customer
accounts could conflict with the transactions and strategies employed by the
Adviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the 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.
An investment policy committee which may include partners of Goldman Sachs and
its affiliates may develop general policies regarding a Fund's activities, but
will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the Adviser are
also principals or employees of Goldman Sachs or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other
32
<PAGE>
entities may be a consideration of which investors in the Funds
should be aware.
The Adviser may enter into transactions and invest in instruments in which
customers of Goldman Sachs serve as the counterparty, principal or issuer. In
such cases, such party's interests in the transaction will be adverse to the
interests of the Funds, and such party may have no incentive to assure that the
Funds obtain the best possible prices or terms in connection with the
transactions. Goldman Sachs and its affiliates may also create, write or issue
derivative instruments for customers of Goldman Sachs or its affiliates, the
underlying securities currencies or instruments of which may be those in which
the Funds invest or which may be based on the performance of a Fund. The Funds
may, subject to applicable law, purchase investments which are the subject of an
underwriting or other distribution by Goldman Sachs or its affiliates and may
also enter into transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interest of the client. To the extent affiliated transac tions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arm's-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms.
33
<PAGE>
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 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.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: Shearson Lehman, Chase Manhattan, Bear
Stearns Cos., Union Bank of Switzerland, Daiwa Securities America, Inc., Morgan
Stanley, Swiss Bank Corp., Smith Barney Shearson, Salomon Brothers, Inc., and
Bankers Trust. As of December 31, 1996, each Fund held the
34
<PAGE>
following amounts of securities of its regular broker/dealers as defined in Rule
10b-1 under the Investment Company Act, or their parents ($ in thousands); Prime
Obligations Fund - Bear Stearns ($149,014), Swiss Bank Corp. ($52,981), Chase
Manhattan ($246,912), Morgan Stanley & Co., Inc. ($267,039); Government Fund -
Bear Stearns ($50,000), Morgan Stanley & Co. ($138,753), Chase Manhattan
($115,627), Swiss Bank Corp. ($62,531); Treasury Obligations Fund - Swiss Bank
Corp. ($252,384), Bear Stearns ($125,000), Lehman Brothers ($125,000), Union
Bank of Switzerland ($125,000), Chase Manhattan ($466,686), Daiwa Securities
($125,000), Morgan Stanley & Co., Inc. ($560,024), Smith Barney Inc. ($100,000);
and Money Market Fund - Swiss Bank Corp. ($36,494), Chase Manhattan ($102,482),
Morgan Stanley & Co., Inc. ($103,879).
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund, Money
Market Plus 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, Money
Market Plus 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 have 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
35
<PAGE>
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.
The Trustees have 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 they deem 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 Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, 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 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 have 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 determine 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
36
<PAGE>
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 creditors, 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
37
<PAGE>
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.
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 shares 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
38
<PAGE>
the sum to the 365/7 power and subtracting one from the result, according to the
following formula:
<TABLE>
<S> <C>
Effective Yield=[(base period return + 1)/to the power of 365 divided by 7/] - 1.
</TABLE>
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 5.34 5.48 N/A
FST Administration Shares 5.09 5.23 N/A
FST Service Shares 4.84 4.98 N/A
FST Preferred Shares 5.24 5.38 N/A
Money Market Fund:
FST Shares 5.38 5.54 N/A
FST Administration Shares 5.13 5.29 N/A
FST Service Shares 4.88 5.04 N/A
FST Preferred Shares 5.28 5.44 N/A
Treasury Obligations Fund:
FST Shares 5.43 5.56 N/A
FST Administration Shares 5.18 5.31 N/A
FST Service Shares 4.93 5.06 N/A
FST Preferred Shares 5.33 5.42 N/A
Government Fund:
FST Shares 5.36 5.52 N/A
FST Administration Shares 5.11 5.27 N/A
FST Service Shares 4.86 5.02 N/A
FST Preferred Shares 5.26 5.42 N/A
Tax-Free Fund:
FST Shares 3.74 3.81 6.19
FST Administration Shares 3.49 3.56 5.78
FST Service Shares 3.24 3.31 5.36
FST Preferred Shares 3.64 3.71 6.03
</TABLE>
39
<PAGE>
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, 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 5.29 5.43 N/A
FST Administration Shares 5.04 5.18 N/A
FST Service Shares 4.79 4.93 N/A
FST Preferred Shares 5.19 5.33 N/A
Money Market Fund:
FST Shares 5.35 5.49 N/A
FST Administration Shares 5.10 5.24 N/A
FST Service Shares 4.85 4.99 N/A
FST Preferred Shares 5.25 5.39 N/A
Treasury Obligations Fund:
FST Shares 5.36 5.51 N/A
FST Administration Shares 5.11 5.26 N/A
FST Service Shares 4.86 5.01 N/A
FST Preferred Shares 5.26 5.41 N/A
Government Fund:
FST Shares 5.31 5.45 N/A
FST Administration Shares 5.06 5.20 N/A
FST Service Shares 4.81 4.95 N/A
FST Preferred Shares 5.21 5.35 N/A
Tax-Free Fund:
FST Shares 3.70 3.76 6.13
FST Administration Shares 3.45 3.51 5.71
FST Service Shares 3.20 3.26 5.30
FST Preferred Shares 3.60 3.66 5.96
</TABLE>
40
<PAGE>
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 (but not limited to) Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Morningstar Mutual Funds, Micropol, 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 (without limitation): inflation and interest
rates, certificates of deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts and repurchase agreements. The Trust may
also compare a Fund's performance with that of other mutual funds with similar
investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Fund's portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Fund's performance data will be based on historical results and is not
intended to indicate future performance. A Fund's performance will vary based
on market conditions, portfolio expenses, portfolio investments and other
factors. Return for a Fund will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield of return.
The Trust may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request. The Trust may from time to time
summarize the substance of discussions contained in shareholder reports in
advertisements and publish the Adviser's views as to markets, the rationale for
a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to shareholders.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or
41
<PAGE>
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 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 gross income for the taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock, securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the 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 not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total (gross) assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the 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
42
<PAGE>
and other 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 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. Dividends paid by a Fund from the
excess of net long-term capital gain (if any) 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. At December 31, 1996, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Tax Free Money Market Fund $13,000 2004
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
43
<PAGE>
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. 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, or earns other taxable
income any distributions of income from such investments or other taxable income
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 or eliminated 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 may
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the
44
<PAGE>
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 and with certain certifications required by the Internal
Revenue Service or if the Internal 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
applicable 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, if applicable, or that the investor is an
exempt recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in 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.
Redemptions (including exchanges) and other dispositions of Fund shares in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Funds successfully maintain a
constant net asset value per share. Shareholers should consult their own tax
advisers with reference to their particular circumstances to determine whether a
redemption, exchange or other disposition of Fund shares is properly treated as
a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder who is required to file a
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
45
<PAGE>
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.
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. 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 and, if a current IRS Form W-8 or acceptable substitute is not on
file with the Fund, may be subject to backup witholding on certain payments.
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 a Fund 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, intangible property 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 intangible property 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.
46
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Funds were reorganized from series of a Massachusetts business trust as
part of Goldman Sachs Trust, a Delaware business trust, under a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares exists, each
class or series must be preferred over all other classes or series in respect of
assets specifically allo cated 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 Statement of Addition al Information,
the Trustees have 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 a 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 custom ers, 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, maintaining 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 mainte nance 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 0.50% of the
average daily net assets of such shares.
It is possible that an institution or its affiliates may offer different classes
of shares (i.e., FST Shares, FST Administration
47
<PAGE>
Shares, FST Service Shares or FST Preferred Shares) to its customers and thus
receive different compensation with respect to different classes of shares of
each 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 notice to shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transfer able and have no preemptive subscription or conversion rights.
As of the date of this Statement of Additional Information, no shares of
Municipal Fund and Plus Fund were outstanding.
As of April 1, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Prime Obligations Fund: Commerce Bank of
Kansas City, PO Box 248, Kansas City, MO 64141 (12.02%), Citicorp Trust NA as
Custodian, 400 Royal Palm Way, Palm Beach, FL 33480 (7.38%) and University of
Texas Systems, 201 W. 7th Street, Austin, TX (11.58%). As of April 1, 1997, the
entities noted below may have owned beneficially 5% or more of the outstanding
shares of Money Market Fund: Loral Corporation, 600 Third Avenue, New York, NY
10016 (9.13%), Chicago Trust Company, 171 N. Clark Street, #5CA, Chicago, IL
60601-3203(7.87%) and Citicorp Trust NA as Custodian, 400 Royal Palm Way, Palm
Beach, FL 33480 (6.50%). As of April 1, 1997, the entities noted below may have
owned beneficially 5% or more of the outstanding shares of Treasury Obligations
Fund: Commerce Bank of Kansas City, NA, PO Box 248, Kansas City, MO 64141
(11.34%), Associated Bank, P.O. Box 1007, Neehah, WI (7.98%), Amalgamated Bank
of Chicago, One West Monroe Street, Chicago, IL 60603 (6.31%), and Fulton Bank,
P.O. Box 3215, Lancaster, PA 17604 (5.52%). As of April 1, 1997, the entities
noted below may have owned beneficially 5% or more of the outstanding shares of
Government Fund: Chicago Trust Company, 171 N. Clark St., Chicago, IL 60601
(21.46%), Mellon Bank, Three Mellon Bank Center, Pittsburgh, PA 15258 (5.64%)
and Texas State Treasury, P.O. Box 12608, Austin, TX 78711 (10.35%). As of
April 1, 1997, the entities noted below may have owned beneficially 5% or more
of the outstanding shares of Tax-Free Fund: Mercantile Bank of St. Louis, N.A.,
Mandell & Company, P.O. Box 387 MPO, St. Louis, MO 63101 (10.48%), Hilliard
Lyons Trust Co., P.O. Box 32760,
48
<PAGE>
Louisville, KY 40232 (6.22%), Commerce Bank of Kansas City, P.O. Box 248, Kansas
City, MO 64141 (16.78%) and Summit Bank, P.O. Box 821, Hackensack, NJ 07602
(8.73%). As of April 1, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Federal Fund: Burlington
Bank & Trust, MATCO, P.O. Box 728, Burlington, IA 52601 (5.48%), Central
Carolina Bank & Trust Co., P.O. Box 931, Durham, NC 27702 (9.75%), Commerce Bank
NA, LENEXA, P.O. Box 419248, Kansas City, MO 64141 (5.64%), Commerce Bank of
Kansas City, P.O. Box 419248, BB4-1, Kansas City, MO 64141 (19.69%), First
National Bank of Southwestern Ohio, P.O. Box 476, Hamilton, OH 45012 (16.40%),
Mercantile Bank of St. Louis, N.A., Mandell & Company, P.O. Box 387 MPO, St.
Louis, MO 63101 (14.13%), United National Bank-NJ, Hubbell & Co., 202 Park
Avenue, Plainfield, NJ 07060 (6.28%). As of April 1, 1997, the entities noted
below may have owned beneficially 5% or more of the outstanding shares of
Treasury Instruments Fund: Central Bank & Trust Co., CEBANTCO, P.O. Box 1360,
Lexington, KY 40590 (10.48%), Chicago Trust Company, 171 N. Clark Street, #5CA,
Chicago, IL 60601 (5.06%), Harris Trust & Savings Bank, 200 W. Monroe Street,
Fl. 12, Chicago, IL 60606 (40.64%), Northern Capital Trust of Fargo, P.O. Box
829, Fargo, ND 58102 (16.70%), William Harris Investors, Inc., 2 N. LaSalle
Street, Ste. 400, Chicago, IL 60602 (22.01%).
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
The Trust is not required to hold annual meetings of shareholders and does not
intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees,
either to one vote for each share or to one vote for each dollar of net asset
value represented by such shares on all matters presented to shareholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote
separately from each other. Shareholders of the Trust do not have cumulative
voting rights in the election of Trustees. Meetings of shareholders of the
Trust, or any series or class thereof, may be called by the Trustees, certain
officers or upon the written request of holders of 10% or more of the shares
entitled to vote
49
<PAGE>
at such meetings. The shareholders of the Trust will have voting rights only
with respect to the limited number of matters specified in the Declaration of
Trust and such other matters as the Trustees may determine or may be required by
law.
The Declaration of Trust provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust acting on behalf of any
affected series, must, upon request by such shareholder, assume the defense of
any claim made against such shareholder for any act or obligation of the series
and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust
without a shareholder vote. However, shareholders of the Trust have the right
to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
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<PAGE>
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or
classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Delaware law, the shareholders of the Funds are not gener ally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in 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 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 provides for indemnification by the relevant
Fund for all loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of 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 any judgment thereon. In view of the above,
the risk of personal liability of shareholders is remote.
In addition to the requirements under the Declaration of Trust, the Trust
provides that shareholders 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 Delaware law who hold at least 10% of the outstand
ing shares of the Fund, or 10% of the outstanding shares of the 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 and to employ
other advisers in considering the merit of the request and shall require an
undertaking by the shareholders making such request to reimburse the Fund for
the expense of any such advisers in the event that the Trustees determine not to
bring such action.
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<PAGE>
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the 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
Arthur Andersen LLP, 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, Arthur Andersen LLP 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, 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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<PAGE>
ADMINISTRATION PLAN
The Trust, on behalf of each Fund, has adopted an administration plan (the
"Plan") with respect to the FST Administration 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 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 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
Administration Shares, (c) answer questions and handle correspondence from
customers regarding their accounts, (d) process customer orders to purchase,
redeem and exchange FST Administration 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 years ended December 31, 1996 and December 31, 1995 and the
eleven months ended December 31, 1994, the amount of administration fees paid by
each Fund to Service Organizations was as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
---------- --------- ---------
<S> <C> <C> <C>
Prime Obligations Fund $ 527,357 $318,346 $139,235
Money Market Fund/(1)/ 474,043 283,241 78,743
Treasury Obligations Fund 1,100,814 457,071 79,171
Government Fund 250,618 131,629 83,036
Tax Free Fund/(2)/ 128,721 32,166 1,800
- ---------------
</TABLE>
(1) FST Administration Share activity commenced May 20, 1994.
(2) FST Administration Share activity commenced August 1, 1994.
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 Administration 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 Administration Shares. In addition, under
some state securities laws, banks and other financial institutions purchasing
FST Administration Shares on behalf of their customers may be required to
register as dealers.
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<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, 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 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.
54
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Financial Square
Funds
- -------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Fund
Money Market Fund
Treasury Obligations Fund
Government Fund
Tax-Free Money Market Fund
- -------------
Goldman
Sachs
- -------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome this opportunity to provide you with a summary of the trends
and key events that affected the economy and the Goldman Sachs Money Market
Trust/Financial Square Funds in 1996. It was another strong year for the Funds,
during which all of the portfolios outperformed their respective IBC Financial
Data, Inc. averages during the period. Assets in the Financial Square Funds
totaled $12.2 billion as of December 31, 1996, up 34% from last year.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation.
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) at 2.0% annualized. Growth was more dramatic during
the second quarter, as industrial activity and automobile and home sales all
showed significant improvement, pushing real GDP to 4.7%, its highest rate in
two years. That growth caused some to expect the Fed to change direction and
tighten before year-end. However, the economy subsequently moderated
significantly, with third-quarter annualized real GDP retreating to 2.1%,
reflecting lackluster consumer spending and a widening U.S. trade deficit. As
1996 drew to a close, moderate economic growth and contained inflation kept the
Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
Funds' weighted average maturities and structures were equally important to our
strategy.
During the second and third quarters of 1996, we extended the Financial
Square Funds' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Funds closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for Financial Square Funds Institutional Shares* as of 12/31/96
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Weighted
SEC 7-Day SEC 7-Day 30-Day Average
Financial Square Current Effective Average Maturity
Funds Yield Yield Yield (days)
=====================================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.34% 5.48% 5.31% 41
- --------------------------------------------------------------------
Money Market 5.38% 5.54% 5.34% 37
- --------------------------------------------------------------------
Treasury
Obligations 5.43% 5.56% 5.29% 33
- --------------------------------------------------------------------
Government 5.36% 5.52% 5.30% 36
- --------------------------------------------------------------------
Tax-Free
Money Market 3.74% 3.81% 3.42% 34
- --------------------------------------------------------------------
</TABLE>
* Financial Square Funds offer four separate classes of shares (Institutional,
Preferred, Administration and Service), each of which is subject to different
fees and expenses that affect performance and entitle shareholders to different
services. The Preferred, Administration and Service shares offer financial
institutions the opportunity to receive a fee for providing administrative
support services. The Preferred shares pay 0.10%, Administration shares pay
0.25%, and the Service shares pay 0.50%. More complete information, including
management fees and expenses, is included in the Funds' prospectus or may be
obtained by calling Goldman Sachs Funds at 1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy Economy and a Strong
Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from the Orange County bankruptcy abated somewhat,
although various forms of credit enhancement remained popular, even among high-
quality issuers. Reflecting the strong national economy, many states and
localities experienced positive financial results, reducing their regular cash
flow borrowings.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Credit Picture Abroad: Europe Improved, While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks.
In Asia, creditworthiness was fairly stable. The notable negative
exception was the Japanese financial sector, which remained under pressure from
the ongoing weakness of the real estate markets, sluggish economic growth and
ongoing deregulation. However, Japan's largest banks have strong fundamentals
and will continue to be important and dominant players in the global financial
market. Australian credit quality strengthened through improved macroeconomic
balances, which provided evidence that Australia's recent boom-and-bust cycles
may be over. The weakness of Asian exports did not affect creditworthiness
directly; exports should recover this year, and the scare could prompt salutary
policy adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market Funds. The Goldman Sachs Credit Department, which has analysts based in
London, Tokyo, Frankfurt and New York, as well as extensive technological assets
and credit expertise, will continue to vigilantly monitor global developments.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, the Financial Square Funds will continue to be managed with
short-to-neutral average life targets and short, laddered structures to prepare
for the probability of higher rates ahead.
Extended Trading Hours Improve Service Further
To meet the needs of many institutional investors who receive inflows of
cash late in the day, we extended the trading hours for both purchases and
redemptions in the Financial Square Treasury Obligations Fund until 5:00 p.m.
EST. (The Financial Square Government Fund also provides late-day service.) We
have found many of our clients enjoy the added flexibility of late-day trading
and are increasing their use of this beneficial service.
In closing, we thank you for your support and for making 1996 a successful
year for the Financial Square Funds. We are pleased that many of you have joined
our conference calls following each Federal Open Market Committee meeting
throughout the year. Our goal is to continue to provide you with competitive
performance, as well as a range of value-added services that reflect the breadth
and depth of Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
- ---------------------
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations--53.0%
Bank Holding Companies
BankAmerica Corp.
$150,000,000 5.27% 03/21/97 $ 148,265,292
Chase Manhattan Corp.
100,000,000 5.28 03/14/97 98,944,000
JP Morgan & Co., Inc.
25,000,000 5.73 05/30/97 24,407,104
NationsBank Corp.
50,000,000 5.40 05/09/97 49,040,000
Business Credit Institutions
General Electric Capital Corp.
50,000,000 5.30 03/26/97 49,381,667
100,000,000 5.44 04/03/97 98,609,778
JC Penney Funding Corp.
50,000,000 5.31 01/31/97 49,778,750
Commercial Banks
CP Trust Certificates Series 1996
85,000,000 5.68/(a)/ 03/28/97 85,000,000
Financial Services
National Rural Utilities Cooperative
34,250,000 5.30 02/11/97 34,043,263
62,000,000 5.28 02/21/97 61,536,240
Life Insurance
Commonwealth Life Insurance Co.
20,000,000 5.64/(b)/ 05/08/97 20,000,000
Pacific Mutual Life Insurance Co.
50,000,000 5.52/(b)/ 02/28/97 50,000,000
Prudential Funding Corp.
50,000,000 6.50 01/02/97 49,990,972
50,000,000 5.43 02/28/97 49,562,583
Motor Vehicles and Equipment
Ford Motor Credit Co.
150,000,000 5.31 02/04/97 149,247,750
Personal Credit Institutions
Associates Corp. of North America
50,000,000 6.30 01/02/97 49,991,250
50,000,000 5.32 01/30/97 49,785,722
50,000,000 5.32 01/31/97 49,778,333
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
10,000,000 5.52 01/28/97 9,958,600
50,000,000 5.43 02/28/97 49,562,584
21,000,000 5.29 03/13/97 20,780,906
31,308,000 5.29 03/14/97 30,976,761
USAA Capital Corp.
30,000,000 5.34 04/07/97 29,572,800
Receivable/Asset Financings
Beta Finance Inc.
16,000,000 5.58 01/27/97 15,935,520
24,000,000 5.58 02/03/97 23,877,240
15,000,000 5.50 02/04/97 14,922,083
19,000,000 5.35 04/07/97 18,728,933
25,000,000 6.11 06/17/97 25,000,000
Delaware Funding Corp.
30,832,000 5.29 02/20/97 30,605,470
Enterprise Funding Corp.
50,000,000 5.33 01/23/97 49,837,139
International Lease Finance Corp.
60,000,000 5.30 03/17/97 59,337,500
20,000,000 5.29 03/24/97 19,759,011
New Center Asset Trust
25,000,000 5.52 01/28/97 24,896,500
25,000,000 5.37 04/04/97 24,653,188
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
100,000,000 5.30 02/13/97 99,366,945
50,000,000 5.30 02/18/97 49,646,667
C.S. First Boston, Inc.
60,000,000 5.33 01/22/97 59,813,450
Merrill Lynch & Co., Inc.
50,000,000 5.35 02/11/97 49,695,347
25,000,000 5.45 02/19/97 24,814,549
75,000,000 5.33 02/26/97 74,378,167
Morgan Stanley Group, Inc.
40,000,000 5.59 01/28/97 39,832,300
50,000,000 5.41 02/03/97 49,752,042
20,000,000 5.32 02/06/97 19,893,600
40,000,000 5.53 06/27/97 40,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations (continued)
Telecommunications
Ameritech Corp.
$ 70,000,000 5.34% 04/07/97 $ 69,003,200
Tobacco
Philip Morris Co.
70,000,000 6.50 01/02/97 69,987,361
- -------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $2,311,433,345
- -------------------------------------------------------------------
Bank Notes--15.6%
Dakota Certificates of Standard Credit Card Master Trust
$ 50,000,000 5.33%(b) 02/07/97 $ 49,726,097
FCC National Bank
40,000,000 5.70 05/22/97 39,953,925
75,000,000 6.00 06/02/97 75,003,030
First Bank FSB
50,000,000 5.62(b) 02/11/97 50,000,000
20,000,000 5.61(b) 04/11/97 19,998,937
First National Bank of Maryland
20,000,000 5.60(b) 09/30/97 19,994,187
Harris Trust & Savings Bank
16,500,000 6.04 06/17/97 16,520,097
Household Bank FSB
50,000,000 5.63(b) 09/23/97 49,997,602
Huntington National Bank
35,000,000 6.05 06/13/97 35,042,420
PNC Bank, N.A.
58,500,000 5.58(b) 04/01/97 58,488,742
100,000,000 5.40(b) 10/01/97 99,941,219
Society National Bank of Cleveland
100,000,000 5.58 05/14/97 99,961,237
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54(b) 05/15/97 24,995,313
- -------------------------------------------------------------------
Total Bank Notes $ 679,622,806
- -------------------------------------------------------------------
U.S. Government Agency Obligations--7.1%
Federal Farm Credit Bank
32,000,000 5.39 02/24/97 31,741,280
Federal Home Loan Mortgage Corp.
50,000,000 5.40 02/24/97 49,595,000
Federal National Mortgage Association
$200,000,000 5.36% 03/04/97 $ 198,153,778
30,000,000 5.35 03/17/97 29,665,625
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 309,155,683
- -------------------------------------------------------------------
Certificates of Deposit--6.9%
Chase Manhattan Corp.
$ 25,000,000 5.75% 02/03/97 $ 25,000,000
25,000,000 5.42 03/12/97 25,000,000
Mellon Bank, N.A.
50,000,000 5.35 02/19/97 50,000,000
100,000,000 5.50 04/07/97 100,000,000
Morgan Guaranty Trust Co.
50,000,000 5.65 02/03/97 50,000,445
Union Bank of California
50,000,000 5.58 02/28/97 50,000,000
- -------------------------------------------------------------------
Total Certificates of Deposit $ 300,000,445
- -------------------------------------------------------------------
Repurchase Agreements--17.7%
C.S. First Boston Corp., dated 12/31/96, repurchase price
$302,790,000 (FNMA: $308,478,596, 6.00%-6.18%, 02/01/09-04/01/34)
$300,000,000 5.40% 03/03/97 $ 300,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $102,538,618, 5.47%, 12/30/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$75,641,250 (FNMA: $78,669,875, 7.50%, 04/01/26)
75,000,000 5.40 02/26/97 75,000,000
Joint Repurchase Agreement Account
297,900,000 6.58 01/02/97 297,900,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 772,900,000
- -------------------------------------------------------------------
Total Investments $4,373,112,279/(c)/
===================================================================
/(a)/Variable rate security - base index is either U.S. Treasury
Bill, one or three month LIBOR, one month commercial paper,
Federal Funds or Prime lending rate
/(b)/Variable rate master note-base index is Federal Funds.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices. The percentages shown for each
investment category reflect the value of investments in that
category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Money Market Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Commercial Paper and Corporate Obligations--45.7%
Commercial Banks
CP Trust Certificates Series 1996
$ 60,000,000 5.68%\(a)\ 03/28/97 $ 60,000,000
Computer Software and Services
First Data Corp.
20,000,000 5.40 02/19/97 19,853,000
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
ABN Amro N.A.
50,000,000 5.45 02/28/97 49,560,972
Banca Crt Financial Corp.
15,000,000 5.35 01/31/97 14,933,125
22,945,000 5.42 04/01/97 22,634,095
20,000,000 5.47 04/03/97 19,720,422
13,000,000 5.42 04/08/97 12,810,149
BBL North America
125,000,000 6.90 01/02/97 124,976,042
Bex America, Inc.
36,000,000 5.36 01/21/97 35,892,900
Generale Bank
70,000,000 5.35 04/10/97 68,970,125
Nordbanken, N.A.
42,559,000 6.50 01/10/97 42,489,842
Royal Bank of Canada
100,000,000 6.50 01/02/97 99,981,944
San Paolo U.S. Finance Corp.
25,000,000 5.36 01/31/97 24,888,333
Swedbank, Inc.
100,000,000 5.47 02/04/97 99,483,389
Unifunding, Inc.
60,000,000 5.45 01/29/97 59,745,667
50,000,000 5.36 04/07/97 49,285,333
Life Insurance
Sunamerica Life Insurance Co.
50,000,000 5.50\(b)\ 09/02/97 50,000,000
Mortgage Brokers
Countrywide Funding Corp.
28,700,000 5.35 01/23/97 28,606,167
27,000,000 5.35 01/28/97 26,891,663
Countrywide Home Loans
50,000,000 6.65 01/02/97 49,990,764
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
16,312,000 5.57% 01/14/97 16,279,190
30,000,000 5.60 01/16/97 29,930,000
10,000,000 5.35 03/25/97 9,876,653
55,000,000 5.35 03/26/97 54,313,417
General Motors Acceptance Corp.
20,000,000 5.57 02/04/97 19,894,789
50,000,000 5.47 04/07/97 49,270,667
Security and Commodity Brokers, Dealers and Services
Merrill Lynch & Co., Inc.
25,000,000 5.35 02/11/97 24,847,674
25,000,000 5.45 02/19/97 24,814,549
50,000,000 5.33 02/26/97 49,585,444
Morgan Stanley Group, Inc.
22,900,000 5.53\(a)\ 06/27/97 22,900,000
Nomura Holdings
15,000,000 5.39 01/28/97 14,939,363
50,000,000 5.39 01/30/97 49,782,903
- --------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $1,351,989,720
- --------------------------------------------------------------------
Bank Notes--15.1%
Dakota Certificates of Standard Credit Card Master Trust
$ 25,000,000 5.33%\(b)\ 02/07/97 $ 24,863,049
FCC National Bank
25,000,000 5.70 05/22/97 24,971,203
50,000,000 6.00 06/02/97 50,002,020
First Bank FSB
75,000,000 5.61\(b)\ 04/11/97 74,996,012
First National Bank of Maryland
30,000,000 5.61\(b)\ 09/26/97 29,991,409
25,000,000 5.60\(b)\ 09/30/97 24,992,734
Household Bank FSB
25,000,000 5.63\(b)\ 09/23/97 24,998,185
Huntington National Bank
10,000,000 6.05 06/13/97 9,996,458
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Money Market Fund (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Bank Notes (continued)
PNC Bank, N.A.
$ 42,000,000 5.46%(b) 09/03/97 $ 41,977,353
50,000,000 5.40(b) 10/01/97 49,970,608
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
50,000,000 5.45(b) 07/11/97 49,983,901
- --------------------------------------------------------------------
Total Bank Notes $ 446,742,932
- --------------------------------------------------------------------
Certificates of Deposit--1.2%
Chase Manhattan Corp.
$ 35,000,000 5.75% 02/03/97 $ 35,000,000
- --------------------------------------------------------------------
Total Certificates of Deposit $ 35,000,000
- --------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$125,000,000 5.49% 03/18/97 $ 125,002,592
Sanwa Bank Ltd., London
100,000,000 5.46 03/21/97 100,001,079
- --------------------------------------------------------------------
Total Certificates of Deposit - Foreign Eurodollar $ 225,003,671
- --------------------------------------------------------------------
Certificates of Deposit - Yankeedollar--12.3%
Fuji Bank, Chicago
$100,000,000 5.52% 01/17/97 $ 100,000,441
Industrial Bank of Japan, New York
100,000,000 5.46 03/19/97 100,001,051
Landesbank Hessen Thuer Gir, New York
50,000,000 6.03 06/13/97 50,060,885
Sumitomo Bank, Los Angeles
75,000,000 5.52 02/28/97 74,994,514
Westpac Banking Corp., New York
40,000,000 5.97 06/06/97 40,027,198
- --------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 365,084,089
- --------------------------------------------------------------------
Time Deposit--2.9%
Bank of Tokyo, Mitsubishi Bank Ltd., London
$ 85,000,000 5.50% 05/16/97 $ 85,000,000
- --------------------------------------------------------------------
Total Time Deposit $ 85,000,000
- --------------------------------------------------------------------
Repurchase Agreements--15.4%
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $69,839,000, 5.47%, 12/30/97; FHLMC:
$32,517,875, 7.26%, 09/17/01)
$100,000,000 6.50% 01/02/97 $ 100,000,000
SBC Government Securities, Inc., dated 12/31/96, repurchase price
$150,052,083 (FNMA Stripped Securities: $149,437,500, 01/23/97;
FNMA: $3,650,246, 6.50%, 08/15/97)
150,000,000 6.25 01/02/97 150,000,000
Joint Repurchase Agreement Account
205,200,000 6.58 01/02/97 205,200,000
- --------------------------------------------------------------------
Total Repurchase Agreements $ 455,200,000
- --------------------------------------------------------------------
Total Investments $2,964,020,412(c)
================================================================================
(a) Variable rate security - base index is either U.S. Treasury Bill, one or
three month LIBOR, one month commercial paper, Federal Funds or Prime
lending rate
(b) Variable rate master note-base index is Federal Funds.
(c) The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Treasury Obligations Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
=====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Notes
$ 100,000,000 5.63% 06/30/97 $ 99,831,980
30,000,000 6.00 09/02/97 29,991,342
92,500,000 5.38 12/01/97 92,370,356
40,000,000 5.25 12/31/97 39,901,534
- --------------------------------------------------------------------
Total U.S. Treasury Obligations $ 262,095,212
====================================================================
Repurchase Agreements--91.9%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$125,046,875 (U.S. Treasury Notes: $127,384,047, 5.75%-5.88%,
10/31/98-12/31/98)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$101,332,500 (U.S. Treasury Note: $102,491,792, 5.50%,
11/15/98)
100,000,000 5.33 03/13/97 100,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase price
$125,046,528 (U.S. Treasury Bond: $71,136,658, 8.50%,
02/15/20; U.S. Treasury Note: $56,365,266, 7.25%, 08/15/04)
125,000,000 6.70 01/02/97 125,000,000
Daiwa Securities, dated 12/31/96, repurchase price $125,047,917
(U.S. Treasury Bill: $127,500,528, 11/13/97)
125,000,000 6.90 01/02/97 125,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Bill: $127,500,296, 12/11/97)
125,000,000 6.60 01/02/97 125,000,000
JP Morgan Securities, dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Notes: $127,371,815, 6.88%-7.75%,
12/31/99-11/15/01)
125,000,000 6.60 01/02/97 125,000,000
Lehman Government Securities, Inc., dated 12/31/96, repurchase
price $125,049,306 (U.S. Treasury Stripped Securities:
$127,500,543, 02/15/97-11/15/03)
125,000,000 7.10 01/02/97 125,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $125,044,792 (U.S. Treasury Bills:
$70,594,041, 01/09/97-01/30/97; U.S. Treasury Stripped
Securities: $14,626,460, 08/15/98-11/15/99; U.S. Treasury
Notes: $42,283,899, 7.50%-9.25%, 05/15/97-11/15/01)
125,000,000 6.45 01/02/97 125,000,000
Nomura Securities International, Inc., dated 12/12/96, repurchase
price $101,335,000 ( U.S. Treasury Bill: $9,629,890, 09/18/97;
U.S. Treasury Notes: $92,371,056, 5.00%-8.13%, 05/31/97-05/31/01)
100,000,000 5.34 03/12/97 100,000,000
Repurchase Agreements (continued)
Sanwa Securities, dated 12/31/96, repurchase price $125,046,875
(U.S. Treasury Notes: $85,107,798, 4.75%-5.25%,
08/31/98-04/30/01; U.S. Treasury Bill: $40,971,000, 10/16/97)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
Smith Barney, Inc., dated 12/11/96, repurchase price $101,335,000
(U.S. Treasury Bill: $1,475,971, 03/13/97; U.S. Treasury
Stripped Security: $ 15,052,048, 02/15/98; U.S. Treasury
Notes: $85,472,470, 4.75%-7.88%, 02/15/97-04/15/98)
100,000,000 5.34 03/11/97 100,000,000
UBS Securities, Inc., dated 12/31/96, repurchase price
$125,047,743 (U.S. Treasury Notes: $127,294,387, 6.13%-7.75%,
05/31/97-11/15/01)
125,000,000 6.88 01/02/97 125,000,000
Joint Repurchase Agreement Account
1,419,100,000 6.58 01/02/97 1,419,100,000
- --------------------------------------------------------------------
Total Repurchase Agreements $2,844,100,000
====================================================================
Total Investments $3,106,195,212/(a)/
====================================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflects the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Government Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
U.S. Government Agency Obligations--44.7%
Federal Home Loan Bank
$ 35,000,000 5.40%(a) 04/04/97 $ 34,991,708
15,000,000 5.45 11/12/97 14,986,333
20,000,000 5.42 12/02/97 19,973,237
50,000,000 5.50(a) 12/26/97 49,959,182
Federal National Mortgage Association
72,000,000 5.35 01/21/97 71,786,000
25,000,000 5.35 01/24/97 24,914,549
20,000,000 5.27(a) 04/04/97 19,985,729
75,000,000 4.75(a) 04/21/97 74,974,867
100,000,000 5.43(a) 09/12/97 99,940,710
50,000,000 5.41(a) 09/29/97 49,981,540
12,500,000 5.53 10/29/97 12,495,125
75,000,000 5.40(a) 12/03/97 74,952,900
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 548,941,880
- -------------------------------------------------------------------
U.S. Treasury Obligations--6.5%
United States Treasury Notes
$ 50,000,000 5.63% 06/30/97 $ 49,915,080
30,000,000 6.00 09/02/97 29,990,027
- -------------------------------------------------------------------
Total U.S. Treasury Obligations $ 79,905,107
- -------------------------------------------------------------------
Repurchase Agreements--49.0%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$50,018,889 (FNMA: $51,422,558, 7.00%, 12/01/11-04/01/24)
$ 50,000,000 6.80% 01/02/97 $ 50,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase price
$50,671,875 (FHLMC: $52,596,865, 7.00%, 11/01/26)
50,000,000 5.38 03/11/97 50,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$50,671,875 (FNMA: $51,607,046, 6.12%, 10/01/32)
50,000,000 5.38 03/11/97 50,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase price
$50,671,875 (FNMA: $52,512,714, 7.50%, 06/01/26)
50,000,000 5.38 03/12/97 50,000,000
Nomura Securities International, Inc., dated 12/31/96, repurchase
price $50,020,833 (FNMA: $34,860,373, 6.50%, 07/01/24; FHLMC:
$16,396,948, 7.00%-8.00%, 12/01/22-12/01/26)
50,000,000 7.50 01/02/97 50,000,000
Joint Repurchase Agreement Account
351,600,000 6.58 01/02/97 351,600,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 601,600,000
- -------------------------------------------------------------------
Total Investments $1,230,446,987/(b)/
===================================================================
/(a)/Variable rate security-base index is either Federal Funds, Prime
lending rate or one month LIBOR.
/(b)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices.
The percentages shown for each investment category reflect the value
of investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Alabama--4.8%
Columbia IDB PCRB for Alabama Power Co. Series 1995 (A-1/VMIG1)
$ 1,500,000 5.00% 01/01/97 $ 1,500,000
Jefferson County MF Hsg. Refunding RB for Hickory Knolls Project
Series 1994 (Amsouth Bank LOC)(P-1)
4,040,000 4.25 01/07/97 4,040,000
Jefferson County Sewer Revenue Warrants Series 1995 A (Bayerische
Landesbank Girozentrale LOC)(A-1+/VMIG1)
18,200,000 4.25 01/07/97 18,200,000
Parrish IDB PCRB for Alabama Power Co. Series 1994 A(A-1+/VMIG1)
2,150,000 5.00 01/01/97 2,150,000
- -------------------------------------------------------------------
$25,890,000
- -------------------------------------------------------------------
Arizona--1.4%
Maricopa County PCRB for Southern California Edison Co.
Series 1985 C(A-1/P-1)
$ 6,450,000 3.60% 03/12/97 $ 6,450,000
Phoenix IDA MF Hsg. VRDN for Del Mar Terrace Apartments (Bank of
America LOC)(MIG1)
1,300,000 4.15 01/07/97 1,300,000
- -------------------------------------------------------------------
$ 7,750,000
- -------------------------------------------------------------------
Arkansas--0.8%
Crossett City PCRB for Georgia Pacific Corp. Series 1991(Suntrust
Bank LOC)(A-1/P-1)
$ 4,500,000 4.15% 01/07/97 $ 4,500,000
- -------------------------------------------------------------------
California--5.0%
California RANS Index Series 1996-97 B(SP-1+/MIG1)
$16,000,000 3.47% 01/31/97 $16,000,000
California RANS VRDN Series 1996-97(SP-1+/VMIG1)
4,300,000 4.00 01/07/97 4,300,000
California School Cash Reserve Program Authority Series 1996
(MBIA)(MIG1)
4,500,000 4.50 12/19/97 4,537,690
Los Angeles County TRANS Series 1996-97 A(Credit Suisse/Morgan
Guaranty/Westdeutsche Landesbank Girozentrale/Bank of America/
Union Bank of Switzerland LOC)(SP-1/MIG1)
2,080,000 4.50 01/07/97 2,087,107
- -------------------------------------------------------------------
$26,924,797
- -------------------------------------------------------------------
Colorado--1.0%
Colorado Health Facilities Authority Series 1992 C(A-1+/VMIG1)
$ 5,500,000 4.15% 01/07/97 $ 5,500,000
- -------------------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES Series 1988 C (Bayerische
Landesbank Girozentrale LOC)(A-1/VMIG1)
$ 6,100,000 4.10% 01/07/97 $ 6,100,000
- -------------------------------------------------------------------
Florida--4.6%
Dade County Water & Sewer RB Series 1994 (FGIC)(A-1/VMIG1)
$ 3,700,000 4.00% 01/07/97 $ 3,700,000
Florida Local Government Pooled CP Notes (First Union National
Bank of Florida LOC)(A-1/P-1)
11,617,735 3.70 01/30/97 11,617,735
Jacksonville PCRB for Florida Power & Light Co. Series 1995
(A-1+/VMIG1)
600,000 5.25 01/01/97 600,000
Putnam County Development Authority for Seminole Electric Series
1984 H VRDN (CFC)(A-1+/P-1)
9,100,000 4.15 01/07/97 9,100,000
- -------------------------------------------------------------------
$25,017,735
- -------------------------------------------------------------------
Georgia--6.8%
Bartow County PCRB for Georgia Power Co. Series 1996(VMIG1)
$ 5,800,000 5.25% 01/01/97 $ 5,800,000
Burke County PCRB for Georgia Power Co. Second Series 1995
(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
Burke County PCRB for Georgia Power Co. Series 1994(VMIG1)
3,800,000 5.00 01/01/97 3,800,000
Burke County PCRB for Georgia Power Co. Series 1995(A+/VMIG1)
3,400,000 5.00 01/01/97 3,400,000
6,300,000 5.25 01/01/97 6,300,000
Floyd County PCRB for Georgia Power Co. Series 1996(A-1/VMIG1)
3,000,000 5.00 01/01/97 3,000,000
Monroe County Development Authority for Georgia Power Scherer
Project Series 1995(A-1/VMIG1)
3,300,000 5.00 01/01/97 3,300,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series 1985 B(Credit Suisse/Morgan
Guaranty/Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
4,575,000 3.55 03/06/97 4,575,000
6,000,000 3.55 04/10/97 6,000,000
- -------------------------------------------------------------------
$36,975,000
- -------------------------------------------------------------------
Hawaii--0.7%
Hawaii Housing Finance and Development Authority MF Hsg.VRDN
Series 1985 A(FHLB LOC)(A-1+)
$ 4,000,000 3.00% 01/07/97 $ 4,000,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Illinois--8.3%
Illinois Health Facilities Authority VRDN for Elmhurst Memorial
Hospital Series 1993 B(VMIG1)
$ 8,900,000 5.30% 01/01/97 $ 8,900,000
Illinois Health Facilities Authority VRDN for Evangelical
Hospitals Corp. Series 1985 A (First National Bank of Chicago
LOC)(VMIG1)
2,600,000 4.10 01/07/97 2,600,000
Illinois Health Facilities Authority VRDN for Healthcorp
Affiliates Projects Series 1985 A (Northern Trust Company
LOC)(VMIG1)
2,700,000 4.15 01/07/97 2,700,000
Illinois Health Facilities Authority VRDN RB for Northwest
Community Hospital Series 1995 (A-1+/VMIG1)
5,000,000 4.20 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for Resurrection
Healthcare(VMIG1)
6,000,000 5.00 01/01/97 6,000,000
Illinois Health Facilities Authority VRDN Series 1985 C and D
Revolving Fund Pooled Finance Program (First National Bank of
Chicago LOC)(A-1/VMIG1)
16,700,000 4.15 01/07/97 16,700,000
Sauget PCRB VRDN for Monsanto Series 1992(P-1)
1,000,000 4.20 01/07/97 1,000,000
Sauget PCRB VRDN for Monsanto Series 1993(P-1)
1,900,000 4.20 01/07/97 1,900,000
- -------------------------------------------------------------------
$44,800,000
- -------------------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN for Parkview Memorial Hospital
Series 1985 B (Bank of America LOC)(VMIG1)
$ 8,100,000 4.15% 01/07/97 $ 8,100,000
Indiana Hospital Equipment Financing Authority VRDN Series 1985 A
(MBIA)(A-1/VMIG1)
2,500,000 4.20 01/07/97 2,500,000
Jasper County PCRB for Nipsco Series 1994 A and C(A-1+/VMIG1)
9,300,000 5.10 01/01/97 9,300,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
7,475,000 4.15% 01/07/97 7,475,000
- -------------------------------------------------------------------
$27,375,000
- -------------------------------------------------------------------
Iowa--2.0%
Chillicothe PCRB for Midwest Power Systems Series 1993 A
(A-1/VMIG1)
$ 3,700,000 4.15% 01/07/97 $ 3,700,000
Muscatine County VRDN for Monsanto Corp. Series 1992(P-1)
7,200,000 4.20 01/07/97 7,200,000
- -------------------------------------------------------------------
$10,900,000
- -------------------------------------------------------------------
Kentucky--0.6%
Calvert PCRB for Air Products and Chemicals, Inc. Project Series
1993 A(A-1)
$ 3,000,000 4.20% 01/07/97 $ 3,000,000
- -------------------------------------------------------------------
Maryland--2.1%
Anne Arundel County RB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
$ 1,000,000 3.65% 03/10/97 $ 1,000,000
5,380,000 3.60 03/13/97 5,380,000
Baltimore County PCRB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
5,000,000 3.70 01/15/97 5,000,000
- -------------------------------------------------------------------
$11,380,000
- -------------------------------------------------------------------
Massachusetts--0.7%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$ 4,000,000 3.75% 02/28/97 $ 4,002,951
- -------------------------------------------------------------------
Michigan--1.0%
Michigan Job Development Authority VRDN for Mazda Motor
Manufacturing Series 1985 (Sumitomo Bank)(VMIG1)
$ 1,400,000 4.25% 01/07/97 $ 1,400,000
Michigan State Strategic Fund Ltd. RB for Dow Chemical Series 1994
(A-1/P-1)
4,200,000 5.10 01/01/97 4,200,000
- -------------------------------------------------------------------
$ 5,600,000
- -------------------------------------------------------------------
Minnesota--1.9%
Minnesota State Higher Education Facility VRDN for Carleton
College Series 3-L2(VMIG1)
$ 6,000,000 4.11% 01/07/97 $ 6,000,000
Port Authority of St. Paul VRDN for Weyerhauser Project Series 1993
(A-1)
4,000,000 4.21 01/07/97 4,000,000
- -------------------------------------------------------------------
$10,000,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Mississippi--0.6%
Grenada County Refunding RB VRDN for Georgia Pacific Corp. Series
1994 (Sumitomo Bank LOC)(A1/P-1)
$ 1,000,000 4.30% 01/07/97 $ 1,000,000
Jackson County PCRB for Chevron USA, Inc. Series 1992(VMIG1)
2,000,000 5.00 01/01/97 2,000,000
- -------------------------------------------------------------------
$ 3,000,000
- -------------------------------------------------------------------
Missouri--1.1%
Missouri Health & Educational Facility Authority VRDN for SSM
Health Care Series 1995 B (MBIA)(AAA)
$ 4,500,000 4.10% 01/07/97 $ 4,500,000
Missouri State Environmental Improvement & Energy Resources
Authority VRDN for Monsanto Corp. Series 1993(P-1)
1,500,000 4.20 01/07/97 1,500,000
- -------------------------------------------------------------------
$ 6,000,000
- -------------------------------------------------------------------
New Jersey--3.1%
State of New Jersey TRANS Series 1997 A(A-1+/P-1)
$17,000,000 3.50% 03/11/97 $17,000,000
- -------------------------------------------------------------------
New Mexico--0.9%
Albuquerque RB for Sisters of Charity Series 1992(A-1+/VMIG1)
$ 5,000,000 4.15% 01/07/97 $ 5,000,000
- -------------------------------------------------------------------
New York--9.5%
Great Neck North Water Authority Water System RB Series 1993 A
(FGIC)(A-1+/VMIG1)
$ 3,400,000 4.00% 01/07/97 $ 3,400,000
New York City GO Series 1994 B (Morgan Guaranty LOC)(A-1/VMIG1)
2,800,000 4.50 01/01/97 2,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
26,000,000 4.50 04/15/97 26,060,135
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
7,500,000 3.50 03/11/97 7,500,000
New York City Municipal Water Finance Authority RB Series 1995 A
(FGIC)(A-1+/VMIG1)
2,900,000 4.70 01/01/97 2,900,000
New York State Local Government VRDN Series 1995 C (Landesbank
Hessen-Thueringen Girozentrale LOC)(A-1+/VMIG1)
3,900,000 4.00 01/07/97 3,900,000
New York State Local Government VRDN Series 1995 G (National
Westminster Bank LOC)(A-1+/MIG1)
4,550,000 3.85 01/07/97 4,550,000
- -------------------------------------------------------------------
$51,110,135
- -------------------------------------------------------------------
North Carolina--6.8%
Rockingham County PCRB for Philip Morris Company Series
1992(A-1/P-1)
$ 7,700,000 4.15% 01/07/97 $ 7,700,000
Wake County PCRB for Carolina Power & Light Series 1990 A (Fuji
Bank LOC)(A-2/P-1)
18,870,000 3.55 02/10/97 18,870,000
Wake County PCRB for Carolina Power & Light Series 1990 B (Fuji
Bank LOC)(A-2/P-1)
10,000,000 3.75 02/13/97 10,000,000
- -------------------------------------------------------------------
$36,570,000
- -------------------------------------------------------------------
Ohio--2.2%
Columbus Electric System RB Series 1984 (Union Bank of Switzerland
LOC)(VMIG1)
$12,000,000 3.35% 01/31/97 $12,000,000
- -------------------------------------------------------------------
Oregon--1.7%
Portland Public Grain Elevator RB for Columbia Grain, Inc. Series
1984 (Fuji Bank/Bank of Tokyo LOC)(VMIG1)
$ 9,450,000 4.25% 01/07/97 $ 9,450,000
- -------------------------------------------------------------------
Pennsylvania--0.8%
Philadelphia TRANS Series 1996-7 A(SP-1/MIG1)
$ 4,500,000 4.50% 06/30/97 $ 4,511,725
- -------------------------------------------------------------------
Puerto Rico--2.3%
Commonwealth of Puerto Rico TRANS Series 1997 A(SP-1+/MIG1)
$12,500,000 4.00% 07/30/97 $12,540,250
- -------------------------------------------------------------------
South Carolina--1.1%
York County Floating/Fixed Rate PCRB Pooled Series 1984 N, North
Carolina Electric Membership Corp. (CFC)(A-1+/MIG1)
$ 5,775,000 4.15% 01/07/97 $ 5,775,000
- -------------------------------------------------------------------
Tennessee--0.6%
Blount County PCRB for Aluminum Company of America Series 1992
(A-1)
$ 2,450,000 4.15% 01/07/97 $ 2,450,000
Bradley County VRDN for Olin Corp. Series 1993 C (Wachovia Bank of
North Carolina LOC)(A-1+)
600,000 5.25 01/01/97 600,000
- -------------------------------------------------------------------
$ 3,050,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Texas--10.5%
Gulf Coast Waste Disposal Authority PCRB for Monsanto Corp. Series
1996(P-1)
$ 5,300,000 4.20% 01/07/97 $ 5,300,000
Harris County Hospital RB for Children's Hospital Series 1989
B-2(VMIG1)
10,000,000 4.10 01/07/97 10,000,000
Harris County Toll Road Adjustable/Fixed Rate Series 1994 C
(A-1+/VMIG1)
1,500,000 4.05 01/07/97 1,500,000
Houston GO Series A(A-1+/P-1)
5,000,000 3.50 03/12/97 5,000,000
Lower Colorado River Authority CP Notes Series C(A-1/P-1)
7,000,000 3.50 03/13/97 7,000,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
17,700,000 5.00 01/02/97 17,700,000
State of Texas TRANS Series 1996(SP-1+/MIG1)
10,000,000 4.75 08/29/97 10,050,571
- -------------------------------------------------------------------
$56,550,571
- -------------------------------------------------------------------
Virginia--4.6%
Louisa IDA PCRB for Virginia Electric & Power Series 1984(A-1/P-1)
$ 3,900,000 3.65% 01/24/97 $ 3,900,000
1,500,000 3.60 01/29/97 1,500,000
4,000,000 3.60 02/18/97 4,000,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
3,500,000 4.10 01/07/97 3,500,000
York County IDA PCRB for Virginia Electric & Power Series 1985
(A-1/A3)
9,000,000 3.70 01/14/97 9,000,000
2,900,000 3.60 02/05/97 2,900,000
- -------------------------------------------------------------------
$24,800,000
- -------------------------------------------------------------------
Washington--4.4%
Washington Healthcare Facility Authority VRDN for Sisters of
Providence Series 1985 B and E(A-1+/VMIG1)
$ 2,900,000 5.00% 01/01/97 $ 2,900,000
Washington Public Power Supply Project Electric RB Series 1993 A-2
(Bank of America LOC)(A-1/VMIG1)
20,880,000 4.10 01/07/97 20,880,000
- -------------------------------------------------------------------
$23,780,000
- -------------------------------------------------------------------
Wisconsin--1.5%
Milwaukee IDRB Multi-Modal for Pharmacia & Upjohn, Inc. Series
1994(P-1)
$ 8,000,000 4.60% 01/07/97 $ 8,000,000
- -------------------------------------------------------------------
Wyoming--0.3%
Converse County PCRB for Pacificorp. Series 1994(AMBAC)
(A-1/VMIG1)
$ 1,700,000 5.00% 01/01/97 $ 1,700,000
- -------------------------------------------------------------------
Total Investments $540,553,164/(a)/
===================================================================
/(a)/ The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rates indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
================================================================================
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
CFC --Unconditionally guaranteed by CFC, Cooperative Finance Corp.
CP --Commercial Paper
FGIC --Insured by Financial Guaranty Insurance Co.
FHLB --Federal Home Loan Bank
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDRB --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TRANS --Tax Revenue Anticipation Notes
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=======================================================================================
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at value
based on amortized cost $4,373,112,279 $2,964,020,412 $ 3,106,195,212 $1,230,446,987 $540,553,164
Interest receivable 11,583,246 11,328,488 2,442,834 3,375,926 2,193,518
Cash 88,907 53,776 72,630 25,740 160,336
Deferred organization expenses, net -- 21,473 -- -- 39,662
Other assets 107,980 65,537 181,145 117,177 14,269
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 4,384,892,412 2,975,489,686 3,108,891,821 1,233,965,830 542,960,949
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable 23,926,806 16,502,413 12,829,625 5,834,710 1,711,051
Accrued expenses and other liabilities 989,400 969,498 919,263 588,231 164,840
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,916,206 17,471,911 13,748,888 6,422,941 1,875,891
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
Accumulated undistributed net realized
gain (loss) on investments 1,090 954 80,038 26,484 (12,859)
===================================================================================================================================
Net assets $4,359,976,206 $2,958,017,775 $3,095,142,933 $ 1,227,542,889 $541,085,058
===================================================================================================================================
Net asset value, offering and redemption
price per share (net assets/shares
outstanding) $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
FST shares 3,901,792,070 2,540,361,007 2,290,967,452 858,743,905 440,850,118
FST Administration shares 215,900,253 165,764,727 536,903,385 145,103,169 51,661,795
FST Service shares 115,154,059 234,380,537 220,555,465 223,556,901 19,855,446
FST Preferred shares 127,128,734 17,510,550 46,636,593 112,430 28,730,558
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest
outstanding, $0.01 par value
(unlimited number of shares
authorized) 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
==================================================================================
<S> <C> <C> <C> <C> <C>
Investment income:
Interest income $273,607,363 $168,464,120 $ 130,875,226 $69,659,598 $19,750,787
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 3,751,933 2,295,135 1,818,328 961,337 420,548
Account administration fees 6,503,286 3,978,642 3,152,251 1,667,071 728,870
Custodian fees 591,036 401,612 349,064 224,733 31,788
Registration fees 143,509 118,595 229,757 143,620 24,284
Trustee fees 78,242 51,602 31,550 16,933 9,385
Amortization of deferred organization expenses -- 9,065 -- -- 15,626
Other 325,076 181,947 184,245 95,419 59,633
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 11,393,082 7,036,598 5,765,195 3,109,113 1,290,134
Less--Expenses reimbursable and fees
waived by Goldman Sachs (2,388,496) (1,598,929) (1,400,520) (800,866) (302,339)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 9,004,586 5,437,669 4,364,675 2,308,247 987,795
Administration share fees 527,357 474,043 1,100,814 250,618 128,721
Service share fees 541,076 271,936 849,624 1,258,434 91,599
Preferred share fees 42,963 2,874 15,097 395 13,155
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses and share fees 10,115,982 6,186,522 6,330,210 3,817,694 1,221,270
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 263,491,381 162,277,598 124,545,016 65,841,904 18,529,517
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 105,304 189,110 587,091 136,538 (5,995)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $263,596,685 $162,466,708 $125,132,107 $65,978,442 $18,523,522
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 263,491,381 $ 162,277,598 $ 124,545,016 $ 65,841,904 $ 18,529,517
Net realized gain (loss) on
investment transactions 105,304 189,110 587,091 136,538 (5,995)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 263,596,685 162,466,708 125,132,107 65,978,442 18,523,522
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (245,389,523) (149,928,272) (93,857,124) (48,867,861) (15,981,710)
FST Administration shares (10,697,750) (9,558,151) (21,870,105) (5,023,737) (1,593,538)
FST Service shares (5,164,431) (2,628,897) (8,020,699) (11,930,553) (522,532)
FST Preferred shares (2,239,677) (162,278) (797,088) (19,753) (431,737)
Net realized gain on investment transactions
FST shares (128,847) (173,838) (385,734) (81,682) --
FST Administration shares (5,617) (11,082) (89,882) (8,397) --
FST Service shares (2,712) (3,048) (32,963) (19,942) --
FST Preferred shares (1,177) (188) (3,276) (33) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders (263,629,734) (162,465,754) (125,056,871) (65,951,958) (18,529,517)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 48,481,127,400 44,257,102,764 20,383,057,696 14,111,648,633 4,669,259,507
Reinvestment of dividends and
distributions 126,514,648 91,077,089 45,060,831 21,912,928 6,495,873
Cost of shares repurchased (47,756,596,271) (43,600,991,427) (19,343,068,853) (13,746,823,336) (4,623,830,243)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share
transactions 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 851,012,728 747,189,380 1,085,124,910 386,764,709 51,919,142
Net Assets:
Beginning of year 3,508,963,478 2,210,828,395 2,010,018,023 840,778,180 489,165,916
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 4,359,976,206 $2,958,017,775 $ 3,095,142,933 $1,227,542,889 $ 541,085,058
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 247,196,840 $ 136,963,014 $ 79,821,378 $ 38,042,394 $ 13,622,900
Net realized gain (loss) on
investment transactions 95,511 7,374 781,869 65,308 (6,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 247,292,351 136,970,388 80,603,247 38,107,702 13,616,036
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (236,894,656) (130,522,374) (63,729,881) (34,713,840) (12,702,550)
FST Administration shares (7,108,569) (6,351,769) (9,995,927) (2,917,098) (455,025)
FST Service shares (3,193,615) (88,871) (6,095,570) (411,456) (465,325)
Net realized gain on investment transactions
FST shares (55,079) (9,474) (612,499) (59,324) --
FST Administration shares (4,463) (504) (99,062) (5,878) --
FST Service shares (1,830) -- (62,143) (106) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (247,258,212) (136,972,992) (80,595,082) (38,107,702) (13,622,900)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 35,913,627,249 33,159,975,346 12,055,344,504 8,904,113,596 3,459,116,162
Reinvestment of dividends and
distributions 88,104,801 69,894,471 14,492,584 15,345,902 3,954,598
Cost of shares repurchased (35,375,137,049) (31,948,570,256) (11,181,309,002) (8,391,284,391) (3,161,776,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share transactions 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 626,629,140 1,281,296,957 888,536,251 528,175,107 301,287,017
Net Assets:
Beginning of year 2,882,334,338 929,531,438 1,121,481,772 312,603,073 187,878,899
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 3,508,963,478 $ 2,210,828,395 $ 2,010,018,023 $ 840,778,180 $ 489,165,916
====================================================================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 34,469,057,699 31,539,337,948 8,859,672,375 8,279,786,329 3,135,487,639
Reinvestment of dividends and
distributions 85,898,572 66,409,325 11,189,134 14,336,357 3,262,842
Shares repurchased (34,034,050,903) (30,399,518,678) (8,241,356,158) (7,808,586,957) (2,873,945,734)
- ------------------------------------------------------------------------------------------------------------------------------------
520,905,368 1,206,228,595 629,505,351 485,535,729 264,804,747
- ------------------------------------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 721,501,944 1,608,362,145 1,309,118,844 331,435,289 110,334,205
Reinvestment of dividends and
distributions 761,953 3,443,404 845,389 785,525 320,945
Shares repurchased (640,480,667) (1,540,953,481) (1,108,896,222) (304,089,584) (91,758,941)
- ------------------------------------------------------------------------------------------------------------------------------------
81,783,230 70,852,068 201,068,011 28,131,230 18,896,209
- ------------------------------------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 723,067,606 12,275,253 1,886,553,285 292,891,978 213,294,318
Reinvestment of dividends and
distributions 1,444,276 41,742 2,458,061 224,020 370,811
Shares repurchased (700,605,479) (8,098,097) (1,831,056,622) (278,607,850) (196,072,204)
- ------------------------------------------------------------------------------------------------------------------------------------
23,906,403 4,218,898 57,954,724 14,508,148 17,592,925
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in shares 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Financial Square Funds, collectively "the Funds" or individually a "Fund". The
Trust is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. Financial Square consists of seven
diversified funds: Prime Obligations, Money Market, Treasury Obligations,
Government, Tax-Free Money Market , Municipal Money Market (inactive) and Money
Market Plus (inactive). The Financial Square Funds offer four classes of shares:
FST shares, FST Administration shares, FST Service shares and FST Preferred
shares. The investment objective of the Funds is to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
Each Fund uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- -------------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company taxable and tax-exempt income to
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax rules.
Therefore, the source of the Funds' distributions may be shown in the
accompanying financial statements as either from or in excess of net investment
income or net realized gain on investment transactions, or from paid-in capital,
depending on the type of book/tax differences that may exist.
At December 31, 1996, the Funds' tax year end, the Tax-Free Money Market
Fund had approximately $13,000 of capital loss carryforward for U.S. Federal tax
purposes. This capital loss carryforward expires in the year 2004.
D. Deferred Organization Expenses--
- ------------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
E. Expenses--
- --------------
Expenses incurred by the Funds that do not specifically relate to an individual
fund are allocated to the Funds based on each Fund's relative average net assets
for the period.
Shareholders of FST Administration, FST Service and FST Preferred shares
bear all expenses and fees paid to service organizations for their services with
respect to such shares as well as other expenses (subject to expense
limitations) that are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser pursuant to
an Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to general
- --------------------------------------------------------------------------------
19
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
supervision of the Trust's Board of Trustees, manages the portfolios of the
Funds. As compensation for the services rendered under the Investment Advisory
Agreement and the assumption of the expenses related thereto, GSAM is entitled
to a fee, computed daily and payable monthly, at an annual rate equal to .075%
of each Fund's average daily net assets. These amounts are included in "Accrued
expenses and other liabilities" in the accompanying Statements of Assets and
Liabilities.
Until further notice, GSAM has voluntarily agreed to limit certain of each
of the Fund's expenses (excluding advisory fees, account administration fees,
service organization fees, taxes, interest, brokerage commissions and
extraordinary expenses) to the extent that such expenses exceed .01% per annum
of that Fund's average daily net assets. These amounts are included in "Other
assets" in the accompanying Statements of Assets and Liabilities.
GSAM also serves as administrator pursuant to an Administration Agreement.
Under the Administration Agreement, GSAM administers each Fund's business
affairs, including providing facilities and transfer agency services. As
compensation for the services rendered under the Administration Agreement, GSAM
is entitled to a fee, computed daily and payable monthly, at an annual rate
equal to .13% of each Fund's average daily net assets. These amounts are
included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and receives no fee. The following chart outlines the
waivers and reimbursements for the year ended December 31, 1996 and amounts owed
to affiliates and due from GSAM at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Adviser Expense Amounts Amounts
Fee Reimburs- due to due from
Fund Waived ements Total GSAM GSAM
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime
Obligations
Fund $1,751 $637 $2,388 $777 $108
- ---------------------------------------------------------------------
Money
Market
Fund 1,142 457 1,599 552 65
- ---------------------------------------------------------------------
Treasury
Obligations
Fund 848 553 1,401 419 155
- ---------------------------------------------------------------------
Government
Fund 449 352 801 197 117
- ---------------------------------------------------------------------
Tax-Free
Money
Market
Fund 217 85 302 86 13
- ---------------------------------------------------------------------
</TABLE>
4. Administration, Service and Preferred Plans
The Funds have adopted Administration, Service and Preferred Plans to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration, Service and Preferred Plans provide for
compensation to the service organizations in an amount up to .25% , .50% and
.10% (on an annualized basis), respectively, of the average daily net asset
value of the respective shares.
5. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended December
31, 1996, the Funds did not have any borrowings under this facility.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Fund's custodian.
7. Joint Repurchase Agreement Accounts
The Funds, together with other registered investment companies having advisory
agreements with GSAM or its affiliates, transfer uninvested cash balances into
joint accounts, the daily aggregate balances of which are invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations.
At December 31, 1996, the Prime Obligations, Money Market, Treasury
Obligations and Government Funds had undivided interests in the repurchase
agreements in the following joint account, which equaled $297,900,000,
$205,200,000, $1,419,100,000 and $351,600,000 in principal amount, respectively.
At December 31, 1996, the repurchase agreements in this joint account, along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date), were as follows:
- --------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$ 200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933 (U.S.
Treasury Notes: $129,531,177, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- --------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
==========================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Fund may enter into certain
principal transactions, including repurchase agreements, with Goldman, Sachs &
Co. subject to certain limitations as follows: 25% of eligible security
transactions, as defined, and 10% of repurchase agreement transactions.
21
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
9. Summary of Share Transactions
Share activity for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Tax-Free
Prime Obligations Money Market Treasury Government Money Market
Fund Fund Obligations Fund Fund Fund
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FST Shares:
Shares sold 44,941,258,260 41,611,799,874 15,303,462,361 11,674,849,553 4,186,677,890
Reinvestment of dividends and
distributions 120,569,689 84,724,371 33,617,264 19,640,980 4,879,667
Shares repurchased (44,455,790,432) (41,225,360,339) (14,633,812,470) (11,579,631,835) (4,199,081,918)
------------------------------------------------------------------------------------------------
606,037,517 471,163,906 703,267,155 114,858,698 (7,524,361)
FST Administration Shares:
Shares sold 1,718,885,581 2,097,089,351 2,868,056,191 1,074,614,378 177,906,627
Reinvestment of dividends and
distributions 2,721,453 5,879,304 4,640,302 1,055,828 844,377
Shares repurchased (1,653,602,695) (2,074,616,324) (2,618,986,546) (1,012,951,862) (148,027,716)
------------------------------------------------------------------------------------------------
68,004,339 28,352,331 253,709,947 62,718,344 30,723,288
FST Service Shares:
Shares sold 1,442,987,405 470,852,368 2,117,230,142 1,353,982,373 239,131,409
Reinvestment of dividends and
distributions 3,217,249 397,187 6,330,034 1,208,640 449,321
Shares repurchased (1,396,329,467) (241,087,916) (2,042,124,197) (1,146,142,260) (239,585,078)
------------------------------------------------------------------------------------------------
49,875,187 230,161,639 81,435,979 209,048,753 (4,348)
FST Preferred Shares:
Shares sold 377,996,154 77,361,171 94,309,002 8,202,329 65,543,581
Reinvestment of dividends and
distributions 6,257 76,227 473,231 7,480 322,508
Shares repurchased (250,873,677) (59,926,848) (48,145,640) (8,097,379) (37,135,531)
------------------------------------------------------------------------------------------------
127,128,734 17,510,550 46,636,593 112,430 28,730,558
------------------------------------------------------------------------------------------------
Net increase in shares 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Ratio of net
Net asset Net realized Total Net asset expenses to
value at Net gain income from Distributions value at average
beginning investment on investment investment to end Total net
of period income transactions operations shareholders of period return(a) assets
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0529 $-- $0.0529 $(0.0529) $1.00 5.41% 0.18%
1996-FST Preferred shares/(c)/... 1.00 0.0346 -- 0.0346 (0.0346) 1.00 5.28/(b)/ 0.28/(b)/
1996-FST Administration shares .. 1.00 0.0506 -- 0.0506 (0.0506) 1.00 5.14 0.43
1996-FST Service shares ......... 1.00 0.0478 -- 0.0478 (0.0478) 1.00 4.88 0.68
1995-FST shares ................. 1.00 0.0586 -- 0.0586 (0.0586) 1.00 6.02 0.18
1995-FST Administration shares .. 1.00 0.0559 -- 0.0559 (0.0559) 1.00 5.75 0.43
1995-FST Service shares ......... 1.00 0.0533 -- 0.0533 (0.0533) 1.00 5.49 0.68
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.38/(b)/ 0.18/(b)/
1994-FST Administration shares/(d)/ 1.00 0.0383 -- 0.0383 (0.0383) 1.00 4.12/(b)/ 0.43/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.86/(b)/ 0.68/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0311 0.0002 0.0313 (0.0313) 1.00 3.18 0.17
1994-FST Administration shares .. 1.00 0.0286 0.0002 0.0288 (0.0288) 1.00 2.92 0.42
1994-FST Service shares ......... 1.00 0.0261 0.0002 0.0263 (0.0263) 1.00 2.66 0.67
1993-FST shares ................. 1.00 0.0360 0.0007 0.0367 (0.0367) 1.00 3.75 0.18
1993-FST Administration shares/(e)/ 1.00 0.0068 0.0001 0.0069 (0.0069) 1.00 3.02/(b)/ 0.44/(b)/
1993-FST Service shares ......... 1.00 0.0301 0.0007 0.0308 (0.0308) 1.00 3.23 0.68
1992-FST shares ................. 1.00 0.0572 0.0002 0.0574 (0.0574) 1.00 5.99 0.18
1992-FST Service shares (e)...... 1.00 0.0027 -- 0.0027 (0.0027) 1.00 4.10/(b)/ 0.66/(b)/
For the Period March 8, 1990 (f)
- --------------------------------
through January 31,
- -------------------
1991-FST shares ................. 1.00 0.0727 -- 0.0727 (0.0727) 1.00 8.27/(b)/ 0.18/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Net Ratio of net
assets at Ratio of investment
end expenses to income to
of period average net average net
(in 000's) assets assets
----------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $3,901,797 0.23% 5.24%
1996-FST Preferred shares/(c)/... 127,126 0.33/(b)/ 5.14/(b)/
1996-FST Administration shares .. 215,898 0.48 5.01
1996-FST Service shares ......... 115,154 0.73 4.73
1995-FST shares ................. 3,295,791 0.22 5.82
1995-FST Administration shares .. 147,894 0.47 5.55
1995-FST Service shares ......... 65,278 0.72 5.29
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 2,774,849 0.24/(b)/ 4.32/(b)/
1994-FST Administration shares/(d)/ 66,113 0.49/(b)/ 4.12/(b)/
1994-FST Service shares/(d)/..... 41,372 0.74/(b)/ 3.92/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1,831,413 0.25 3.03
1994-FST Administration shares .. 35,250 0.50 2.78
1994-FST Service shares ......... 14,001 0.75 2.53
1993-FST shares ................. 813,126 0.25 3.53
1993-FST Administration shares/(e)/ 1,124 0.52/(b)/ 2.88/(b)/
1993-FST Service shares ......... 336 0.75 2.94
1992-FST shares ................. 917,073 0.27 5.63
1992-FST Service shares/(e)/..... 118 0.74/(b)/ 4.02/(b)/
For the Period March 8, 1990/(f)/
- ---------------------------------
through January 31,
- -------------------
1991-FST shares ................. 578,495 0.28/(b)/ 7.94/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration share and FST Service share activity commenced during
November of 1992 and January of 1992, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=================================
Net Asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end
of period income transactions operations shareholders of period
=========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares ................. $1.00 $0.0533 $0.0001 $0.0534 $(0.0534) $1.00
1996-FST Preferred shares/(c)/... 1.00 0.0348 -- 0.0348 (0.0348) 1.00
1996-FST Administration shares .. 1.00 0.0504 0.0001 0.0505 (0.0505) 1.00
1996-FST Service shares ......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995-FST shares ................. 1.00 0.0589 -- 0.0589 (0.0589) 1.00
1995-FST Administration shares .. 1.00 0.0561 -- 0.0561 (0.0561) 1.00
1995-FST Service shares/(d)/..... 1.00 0.0231 -- 0.0231 (0.0231) 1.00
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 1.00 0.0305 -- 0.0305 (0.0305) 1.00
1994-FST Administration shares
/(d)/......................... 1.00 0.0298 -- 0.0298 (0.0298) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
Total average net average net of period average net average net
return/(a)/ assets assets (in 000's) assets assets
==========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares.................. 5.45% 0.18% 5.33% $2,540,366 0.23% 5.28%
1996-FST Preferred shares/(c)/... 5.31/(b)/ 0.28/(b)/ 5.23/(b)/ 17,510 0.33/(b)/ 5.18/(b)/
1996-FST Administration shares... 5.19 0.43 5.04 165,766 0.48 4.99
1996-FST Service shares.......... 4.93 0.68 4.84 234,376 0.73 4.79
1995-FST shares................. 6.07 0.15 5.89 2,069,197 0.23 5.81
1995-FST Adminstration shares.... 5.80 0.40 5.61 137,412 0.48 5.53
1995-FST Services shares/(d)/.... 5.41/(b)/ 0.65/(b)/ 4.93/(b)/ 4,219 0.73/(b)/ 4.85/(b)/
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 4.91/(b)/ 0.11/(b)/ 4.88/(b)/ 862,971 0.25/(b)/ 4.74/(b)/
1994-FST Adminstration shares/(d)/ 4.65/(b)/ 0.36/(b)/ 4.82/(b)/ 66,560 0.50/(b)/ 4.68/(b)/
</TABLE>
- ------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST, FST Adminstration and FST Service share activity commenced May 18,
1994, May 20, 1994 and July 14, 1995, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain (loss) from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0522 $0.0003 $0.0525 $(0.0524) $1.00 5.35%
1996-FST Preferred shares/(c)/... 1.00 0.0342 0.0001 0.0343 (0.0343) 1.00 5.24/(b)/
1996-FST Administration shares .. 1.00 0.0497 0.0002 0.0499 (0.0498) 1.00 5.09
1996-FST Service shares ......... 1.00 0.0472 0.0002 0.0474 (0.0474) 1.00 4.83
1995-FST shares ................. 1.00 0.0573 0.0005 0.0578 (0.0578) 1.00 5.96
1995-FST Administration shares .. 1.00 0.0547 0.0005 0.0552 (0.0552) 1.00 5.69
1995-FST Service shares ......... 1.00 0.0521 0.0005 0.0526 (0.0526) 1.00 5.43
For the Year Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 1.00 0.0379 (0.0001) 0.0378 (0.0378) 1.00 4.23/(b)/
1994-FST Administration shares
/(d)/.......................... 1.00 0.0388 (0.0001) 0.0387 (0.0387) 1.00 3.97/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0349 (0.0001) 0.0348 (0.0348) 1.00 3.71/(b)/
For the Year Ended December 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0301 0.0007 0.0308 (0.0307) 1.00 3.11
1994-FST Administration shares .. 1.00 0.0276 0.0006 0.0282 (0.0281) 1.00 2.85
1994-FST Service shares ......... 1.00 0.0251 0.0008 0.0259 (0.0256) 1.00 2.60
1993-FST shares ................. 1.00 0.0342 0.0012 0.0354 (0.0355) 1.00 3.69
1993-FST Administration shares
/(e)/.......................... 1.00 0.0009 -- 0.0009 (0.0009) 1.00 2.83/(b)/
1993-FST Service shares ......... 1.00 0.0296 0.0016 0.0312 (0.0309) 1.00 3.17
1992-FST shares ................. 1.00 0.0549 0.0015 0.0564 (0.0561) 1.00 5.84
1992-FST Service shares/(e)/..... 1.00 0.0113 0.0006 0.0119 (0.0116) 1.00 4.47/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -------------------------------------------
1991-FST shares ................. 1.00 0.0600 0.0006 0.0606 (0.0605) 1.00 8.06/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.22% $2,291,051 0.24% 5.16%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.11/(b)/ 46,637 0.34/(b)/ 5.05/(b)/
1996-FST Administration shares .. 0.43 4.97 536,895 0.49 4.91
1996-FST Service shares ......... 0.68 4.72 220,560 0.74 4.66
1995-FST shares ................. 0.18 5.73 1,587,715 0.23 5.68
1995-FST Administration shares .. 0.43 5.47 283,186 0.48 5.42
1995-FST Service shares ......... 0.68 5.21 139,117 0.73 5.16
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 0.18/(b)/ 4.13/(b)/ 958,196 0.25/(b)/ 4.06/(b)/
1994-FST Administration shares
/(d)/.......................... 0.43/(b)/ 4.24/(b)/ 82,124 0.50/(b)/ 4.17/(b)/
1994-FST Service shares/(d)/..... 0.68/(b)/ 3.82/(b)/ 81,162 0.75/(b)/ 3.75/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 0.17 3.01 812,420 0.24 2.94
1994-FST Administration shares .. 0.42 2.76 24,485 0.49 2.69
1994-FST Service shares ......... 0.67 2.51 35,656 0.74 2.44
1993-FST shares ................. 0.18 3.42 776,181 0.26 3.34
1993-FST Administration shares
/(e)/.......................... 0.43/(b)/ 2.83/(b)/ 1 0.51/(b)/ 2.75/(b)/
1993-FST Service shares ......... 0.68 2.96 5,155 0.76 2.88
1992-FST shares ................. 0.18 5.49 413,171 0.28 5.39
1992-FST Service shares/(e)/..... 0.68/(b)/ 3.77/(b)/ 3,634 0.78/(b)/ 3.67/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -----------------------------------
1991-FST shares ................. 0.21/(b)/ 7.74/(b)/ 229,988 0.34/(b)/ 7.61/(b)/
- ----------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration and FST Service share activity commenced during January
of 1993 and October of 1991, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0525 $0.0001 $0.0526 $(0.0526) $1.00 5.38%
1996-FST Preferred shares/(c)/... 1.00 0.0344 0.0001 0.0345 (0.0345) 1.00 5.26/(b)/
1996-FST Administration shares .. 1.00 0.0501 0.0001 0.0502 (0.0502) 1.00 5.12
1996-FST Service shares ......... 1.00 0.0474 0.0001 0.0475 (0.0475) 1.00 4.86
1995-FST shares ................. 1.00 0.0581 0.0001 0.0582 (0.0582) 1.00 6.00
1995-FST Administration shares .. 1.00 0.0554 0.0001 0.0555 (0.0555) 1.00 5.74
1995-FST Service shares/(d)/..... 1.00 0.0320 -- 0.0320 (0.0320) 1.00 5.40/(b)/
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(e)/............. 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.36/(b)/
1994-FST Administration shares
/(e)/.......................... 1.00 0.0426 -- 0.0426 (0.0426) 1.00 4.10/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 1.00 0.0256 0.0001 0.0257 (0.0257) 1.00 3.14/(b)/
1993-FST Administration shares
/(d)/.......................... 1.00 0.0120 0.0001 0.0121 (0.0121) 1.00 2.87/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.25% $858,769 0.24% 5.19%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.14/(b)/ 112 0.34/(b)/ 5.08/(b)/
1996-FST Administration shares .. 0.43 5.01 145,108 0.49 4.95
1996-FST Service shares ......... 0.68 4.74 223,554 0.74 4.68
1995-FST shares ................. 0.18 5.81 743,884 0.24 5.75
1995-FST Administration shares .. 0.43 5.54 82,386 0.49 5.48
1995-FST Service shares/(d)/..... 0.68/(b)/ 5.08/(b)/ 14,508 0.74/(b)/ 5.02/(b)/
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(e)/............. 0.15/(b)/ 4.64/(b)/ 258,350 0.25/(b)/ 4.54/(b)/
1994-FST Administration shares
/(e)/.......................... 0.40/(b)/ 4.67/(b)/ 54,253 0.50/(b)/ 4.57/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 0.08/(b)/ 3.10/(b)/ 44,697 0.59/(b)/ 2.59/(b)/
1993-FST Administration shares
/(d)/.......................... 0.35/(b)/ 2.85/(b)/ 14,126 0.76/(b)/ 2.44/(b)/
- ---------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced April 6, 1993, September 1, 1993 and May 16, 1995, respectively.
/(e)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations shareholders period return /(a)/
===========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... $1.00 $0.0335 -- $0.0335 $(0.0335) $1.00 3.39%
1996-FST Preferred shares /(c)/....... 1.00 0.0218 -- 0.0218 (0.0218) 1.00 3.30/(b)/
1996-FST Administration shares ....... 1.00 0.0310 -- 0.0310 (0.0310) 1.00 3.13
1996-FST Service shares .............. 1.00 0.0285 -- 0.0285 (0.0285) 1.00 2.88
1995-FST shares ...................... 1.00 0.0381 -- 0.0381 (0.0381) 1.00 3.89
1995-FST Administration shares ....... 1.00 0.0354 -- 0.0354 (0.0354) 1.00 3.63
1995-FST Service shares .............. 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.38
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 1.00 0.0156 -- 0.0156 (0.0156) 1.00 3.41/(b)/
1994-FST Administration shares /(d)/.. 1.00 0.0136 -- 0.0136 (0.0136) 1.00 3.19/(b)/
1994-FST Service shares /(d)/......... 1.00 0.0091 -- 0.0091 (0.0091) 1.00 3.11/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... 0.18% 3.35% $440,838 0.23% 3.30%
1996-FST Preferred shares /(c)/....... 0.28/(b)/ 3.26/(b)/ 28,731 0.33/(b)/ 3.21/(b)/
1996-FST Administration shares ....... 0.43 3.10 51,661 0.48 3.05
1996-FST Service shares .............. 0.68 2.85 19,855 0.73 2.80
1995-FST shares ...................... 0.14 3.81 448,367 0.24 3.71
1995-FST Administration shares ....... 0.39 3.54 20,939 0.49 3.44
1995-FST Service shares .............. 0.64 3.32 19,860 0.74 3.22
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 0.07/(b)/ 3.42/(b)/ 183,570 0.31/(b)/ 3.18/(b)/
1994-FST Administration shares /(d)/.. 0.32/(b)/ 3.25/(b)/ 2,042 0.56/(b)/ 3.01/(b)/
1994-FST Service shares /(d)/......... 0.57/(b)/ 3.32/(b)/ 2,267 0.81/(b)/ 3.08/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced July 19, 1994, August 1, 1994 and September 23, 1994,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Money Market
Trust--Financial Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Money Market Trust--Financial Square Funds (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds), including the
statements of investments, as of December 31, 1996, and the related statements
of operations, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Financial Square Funds as of December 31, 1996, the results of
their operations and the changes in their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- ------------------------------------- ---------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- -----------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--Financial
Square Funds Prospectus which contains facts concerning each Fund's objectives
and policies, management, expenses and other information.
- --------------------------------------------------------------------------------
31
<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.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered a super-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories. The
modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
- --------------------------------------------------------------------------------
* 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 often be evidenced
by many of the following charac teristics:
. Leading market positions in well established indus tries.
. 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/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand feature-
variable rate demand obligation. Such ratings will be designated as VMIG to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors
A-2
<PAGE>
should be alert to the fact that the source of payment may be limited to the
external liquidity with no or limited legal recourse to the issuer in the event
the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the addition of
a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more suscep tible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
Municipal Notes
- ---------------
A Standard & Poor's note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
A-3
<PAGE>
. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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: The highest credit quality. The risk factors are negligi ble, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and - in the AA and A catego ries for long-
term fixed securities. The modifier + indicates that the security ranks in the
higher end of the category; the modifier AA or A indicates a mid-range ranking;
and the modifier - indicates that the issue ranks in the lower end of the
category.
A-4
<PAGE>
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 requirements, access to capital markets is good and risk factors
are small.
Duff & Phelps applies a plus and minus rating scale, D-1+, D-1 and D-1- in the
Duff 1 top grade category for short-term debt. The rating D-1+ indicates that
the security has the highest certainty of timely payment, short-term liquidity
is clearly 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 fore-
seeable future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds which are rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA- .
A-5
<PAGE>
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very strong
credit quality. Those issues determined to possess exceptionally strong credit
quality and having the strongest degree of assurance for timely payment will be
denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good credit
quality. Issues assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity for
timely repayment. Where issues possess a particu larly strong credit feature a
rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfac tory 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 an extremely high ability to repay
principal and interest on a timely basis.
AA:The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal and
interest is strong. Issuer rated A could be more vulnerable to adverse
developments (both internal an external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
A-6
<PAGE>
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
A-7
<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 Funds offer banks, corporate cash managers, investment
advisers and other institutional investors a family of professionally-managed
mutual funds, including money market, fixed income and equity funds, and a range
of related services. All products are designed to provide clients with the
benefit of the expertise of GSAM and its affiliates in security selection, asset
allocation, portfolio construction and day-to-day management.
The hallmark of the Goldman Sachs Funds is personalized service, which reflects
the priority that Goldman Sachs places on serving clients' interests. As
Goldman Sachs clients, 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
personal com puter 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.
<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..................... 22
The Adviser, Distributor
and Transfer Agent................... 28
Portfolio Transactions.................... 33
Net Asset Value........................... 35
Redemptions............................... 37
Calculation of Yield Quotations........... 38
Tax Information........................... 42
Organization and Capitalization........... 47
Custodian and Subcustodian................ 52
Independent Accountants................... 52
Financial Statements...................... 52
Service Plan.............................. 53
Appendix A (Description of Securities
Ratings)............................. A-1
</TABLE>
<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 guaran-
tee 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 enter into repurchase
agreements only with primary dealers in U.S. Government Securities. A
repurchase agreement is an arrangement under which the purchaser (i.e., the
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 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, install-
ment 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, a Fund 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 Receivables/sm/ ("CARS/sm/") and interests in pools
of credit card receivables. CARS/sm/ represent undivided fractional interests
in a trust ("CAR Trust") whose assets consist of a pool of motor vehicle retail
installment sales contracts and security interests in the vehicles securing the
contracts. Payments of principal and interest on CARS/sm/ are passed through
monthly to certificate holders, and are guaranteed up to certain amounts and for
a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the CAR Trust. An investor's
return on CARS/sm/ may be affected by early prepayment of principal on the
underlying vehicle sales contracts. If the letter of credit is exhausted, the
CAR Trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the
benefit of any security interest in the related assets. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. There is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets
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 any net capital gains
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
9
<PAGE>
maintain in a segregated account cash or liquid assets 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
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be eligible for purchase by a Fund, a variable or floating rate 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 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
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<PAGE>
Adviser the daily function of determining and monitoring liquidity of
restricted securities. The Board of Trustees, however, will retain sufficient
oversight and be ultimately responsible for the determinations. Since it is not
possible to predict with assurance 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
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such custodial receipts are excluded from gross income for 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
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industrial user. Tax-Free Fund does not intend to invest in 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 finan-
cial 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
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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 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
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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 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,
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the policy of each Fund that may enter into such 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 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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Accordingly, the Trust may not on behalf of any Fund (except for Government
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 the 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 and 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 such 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 that (a) the Fund may borrow from banks (as defined in
the Investment Company Act) or through re verse repurchase agreements in
amounts up to 33/1/3/% of its total assets (including the amount borrowed),
(b) the Fund may, to the extent permitted by applicable law, borrow up to
an additional 5% of its total assets for temporary purposes, (c) the Fund
may obtain such short-term credits as may be necessary for the clearance of
purchases and sales of port-
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folio securities, and (d) the Fund may purchase securities on margin to the
extent permitted by applicable law.
(4) make loans, except through (a) the purchase of debt obligations in
accordance with each 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 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.
Government Fund may not:
(1) with respect to 75% of its total assets taken at market value, invest more
than 5% of the value of the total assets of that Fund in the securities of any
one issuer, except U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. This restriction does not,
however, apply to any Fund classified as a non-diversified company under the
Investment Company Act;
(2) with respect to 75% of its total assets taken at market value, purchase the
securities of any one issuer if, as a result of such purchase, that Fund would
hold more than 10% of the outstanding voting securities of that issuer. This
restriction does not, however, apply to any Fund classified as a non-diversified
company under the Investment Company Act;
(3) borrow money, except from banks on a temporary basis for extraordinary or
emergency purposes, provided that a Fund is required to maintain asset coverage
of 300% for all borrowings and that no purchases of securities will be made if
such borrowings exceed 5% of the value of the Fund's assets. This restriction
does not apply to cash collateral received as a result of portfolio securities
lending;
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(4) mortgage, pledge or hypothecate its assets except to secure permitted
borrowings;
(5) act as underwriter of the securities issued by others, except to the extent
that the purchase of securities in accordance with a Fund's investment
objective and policies directly from the issuer thereof and the later
disposition thereof may be deemed to be underwriting;
(6) purchase securities if such purchase would cause more than 25% 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, provided that there is no limitation with respect to, and
the Fund reserves freedom of action, when otherwise consistent with its
investment policies to, concentrate its investments in, U.S. Government
securities, obligations (other than commercial paper) issued or guaranteed by
U.S. banks, and U.S. branches of foreign banks and repurchase agreements and
securities loans collateralized by U.S. Government securities or such bank
obligations. (For the purposes of this restriction, state and municipal
governments and their agencies and authorities are not deemed to be industries,
and 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.
Such concentration may be effected when the Adviser determines that risk
adjusted returns in such industries are considered favorable relative to other
industries.)
(7) issue senior securities, except as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust;
(8) purchase or sell real estate (excluding securities secured by real estate
or interests therein), interests in oil, gas or mineral leases, commodities or
commodities contracts. The Trust reserves the freedom to hold and to sell real
estate acquired for any Fund as a result of the ownership of securities;
(9) make loans to other persons, except loans of portfolio securities and
except to the extent that the purchase of debt obligations and entry into
repurchase agreements in accordance with such Fund's investment objective and
policies may be deemed to be loans;
(10) purchase securities on margin (except for delayed delivery or when-issued
transactions or such short-term credits as are necessary for the clearance of
transactions), make short sales of securities, maintain a short position, or
invest in or write puts, calls or combinations thereof (except that a Fund may
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acquire puts in connection with the acquisition of a debt instrument);
(11) invest in other companies for the purpose of exercising control or
management.
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.
As money market funds, the Funds 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 Fund's portfolio may not exceed
397 days and a Fund'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 Fund, other
than the Tax-Exempt Funds, as a matter of non-funda mental policy only invests
in First Tier securities. Portfolio diversification. The Prime Obligations,
Money Market Plus, Government, Treasury Obligations, Money Market, Federal,
Treasury Instruments and Tax-Free Money Market Funds may not invest more than
5% of their total assets in the securities of any one issuer (except U.S.
Government securities, repurchase agreements collateralized by such securities
and certain securities subject to a guarantee or unconditional demand feature).
Each of such
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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. 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 Fund , no more than 10%
of the Fund'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 Funds (which are
the only Funds that may 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 Funds' total assets may be invested in securities or puts issued by
the institution that issued the put. The Tax-Exempt Fund's investment in Second
Tier securities that are conduit securities, which are municipal securities
involving an agreement or arrangement providing for payment by a person other
than the issuer of the municipal security, that are not subject to an
unconditional demand feature, may not exceed 5% of the Fund's total assets and
the Fund's investment in such conduit securities issued by any issuer may not
exceed 1% of the Fund's total assets. Securities which are rated in the highest
short-term rating category by at least two Nationally Recognized Statistical
Rating Organizations ("NRSROs"), or if only one NRSRO has assigned a rating, by
that NRSRO, are "First Tier Securities". Securities rated in the top two short-
term rating categories by at least two NRSROs, but which are not First Tier
Securities are "Second Tier Securities." NRSROs include S&P, Moody's, Fitch
Investors Services, Inc., Duff and Phelps, Inc., IBCA Limited and its affiliate
IBCA Inc., and Thomson BankWatch, Inc. For a description of their rating
categories, see Appendix A.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a 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.
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<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); Senior
Vice President of Scott Paper Company
until June 1994; Director of Arkwright
Mutual Insurance Company; Trustee of
International House of Philadelphia;
Member of Cornell University Council;
Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman
One New York Plaza Sachs (since 1996); General
New York, NY 10004 Partner, Goldman Sachs (1986-1996); Co-
Head of GSAM (since December 1994).
*Douglas C. Grip, 35 Trustee & Vice President, Goldman Sachs
One New York Plaza President (since May 1996); President, MFS
New York, NY 10004 Retirement Services Inc., of Massachu-
setts Financial Services (prior
thereto).
*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);
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
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
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).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza Commonwealth, Inc. (a managed dental
#218 care company, (since January 1996);
Northfield, IL 60093 Chairman and Chief Executive Officer,
MSP Communications Inc. (a company
engaged in radio broadcasting) (since
November 1988); Director, Federal
Express Corporation (since 1976),
Evanston Hospital Corporation (since
1980), First Commonwealth, Inc. (since
1988) and North American Private Equity
Group (a venture capital fund).
William H. Springer, 67 Trustee Vice Chairman and Chief Financial and
701 Morningside Drive Administrative Officer of Ameritech (a
Lake Forest, IL 60045 telecommunications holding
company,(February 1987 to June 1991);
Director, Walgreen Co. (a retail drug
store business); Director of Baker,
Fentress & Co. (a closed-end, management
investment company.
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners, Inc.
70 West Madison St. (since 1990); President and Chief
Suite 1400 Executive Officer, Microdot, Inc.
Chicago, IL 60602 (a diversified manufacturer of fastening
systems and
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ---------------------- ---------- -----------------------------
<S> <C> <C>
connectors)(January 1984 to
October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds Administration,
One New York Plaza GSAM (since April 1994); Assistant
New York, NY 10004 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 Investors Bank and Trust
10004 Company (November 1993 to July 1995); Audit
Manager of Arthur Andersen LLP (prior
thereto).
*Pauline Taylor, 50 Vice Vice President of Goldman Sachs (since
4900 Sears Tower President June 1992); Director, Shareholder Servicing
Chicago, IL of GSAM (since June 1992).
60606
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and Manager
4900 Sears Tower President of Shareholder Servicing of GSAM (since
Chicago, IL November 1989).
60606
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs;
4900 Sears Tower President Manager of Shareholder
Chicago, IL Servicing of GSAM (since
60606 November 1989).
*Michael J. Richman, 36 Secretary Associate General Counsel of
85 Broad Street GSAM (since February 1994);
New York, NY Vice President and Assistant
10004 General Counsel of Goldman
Sachs (since June 1992);
Counsel to the Funds Group,
GSAM (since June 1992);
Partner, Hale and Dorr (Sep-
tember 1991 to June 1992).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Howard B. Surloff, 31 Assistant Assistant General Counsel and
85 Broad Street Secretary Vice President, Goldman Sachs
New York, NY 10004 (since November 1993 and May 1994,
respectively ); Counsel to the Funds
Group, GSAM (since November 1993); Asso-
ciate of Shereff, Friedman, Hoffman &
Goodman (prior thereto).
*Valerie Zondorak, 31 Assistant Vice President, Goldman Sachs
85 Broad Street Secretary (since March 1997); Counsel to
New York, NY 10004 the Funds Group, GSAM (since March
1997); Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
*Steven E. Hartstein, Assistant Legal Products Analyst,
33 Secretary Goldman Sachs (June 1993 to
85 Broad Street present); Funds Compliance
New York, NY 10004 Officer, Citibank Global Asset
Management (August 1991 to June 1993).
*Deborah Farrell, 25 Assistant Legal Assistant, Goldman
85 Broad Street Secretary Sachs (since January 1994).
New York, NY 10004 Formerly at Cleary Gottlieb,
Steen and Hamilton.
*Kaysie P. Uniacke, 36 Assistant Vice President and Senior
One New York Plaza Secretary Portfolio Manager, GSAM (since 1988).
New York, NY 10004
*Elizabeth D.
Anderson, 27 Assistant Portfolio Manager, GSAM (since
One New York Plaza Secretary April 1996); Junior Portfolio
New York, NY 10004 Manager, GSAM (since 1995-1996); 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 1,
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.
26
<PAGE>
The following table sets forth certain information with respect to the
compensation of each Trustee of the Trust for the fiscal year ended December 31,
1996:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman 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.** $28,050 $0 $62,450
Ashok N. Bakhru $35,126 $0 $69,299
Marcia L. Beck*** $0 $0 $0
David B. Ford $0 $0 $0
Alan A. Shuch $0 $0 $0
Jackson W. Smart $29,198 $0 $58,954
William H. Springer $29,198 $0 $58,954
Richard P. Strubel $29,198 $0 $58,594
</TABLE>
______________
* The Goldman Sachs Mutual Funds consisted of 29 mutual funds, including
the five Funds in existence on December 31, 1996.
** Retired as of June 30, 1996.
*** Resigned as President and Trustee on May 1, 1996.
27
<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 certain
other expenses (excluding management fees, fees payable to Service
Organizations, 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 a
portion of its management fee.
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 Funds' custodian, fees and
expenses of the Funds' transfer agent, filing fees for the registration or
qualification of shares under federal or state securities laws, expenses of the
organization of the Funds, 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 Funds 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, their proportionate share of the compensation and
expenses of the Trust's "non-interested" Trustees, and extraordinary expenses
incurred by the Funds.
28
<PAGE>
Prior to May 1, 1997, the Funds then in operation had separate investment
advisory and administration agreements. Effective May 1, 1997 the services
under such agreements were combined in the Management Agreement. The services
required to be performed for the Funds and the combined advisory and
administration fees payable by the Funds under the former advisory and
administration agreements are identical to the services and fees under the
Management Agreement. For the fiscal years ended December 31, 1996 and December
31, 1995 and the eleven months ended December 31, 1994 the amounts of the
management fee (including both advisory and administration fees) incurred by
each Fund were as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
----------- ----------- -----------
<S> <C> <C> <C>
Prime Obligations Fund $8,504,328 $7,194,392 $3,485,286
Money Market Fund/(1)/ 5,131,644 3,236,027 900,121
Treasury Obligations Fund 4,121,944 2,401,903 1,186,773
Government Fund 2,179,655 1,119,731 243,841
Tax-Free Money Market Fund/(2)/ 930,176 459,413 35,436
- ------------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ Commenced operations July 19, 1994.
GSAM has agreed that it will not impose a portion of its manage ment fee. Had
such fees been imposed, the following additional fees (including both advisory
and administration fees) would have been incurred by these Funds for the periods
indicated:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
---------- ---------- ----------
<S> <C> <C> <C>
Prime Obligations Fund $1,750,891 $3,173,924 $1,609,383
Money Market Fund/(1)/ 1,142,133 1,063,477 482,154
Treasury Obligations Fund 848,635 1,747,326 554,447
Government Fund 448,753 493,804 159,290
Tax-Free Money Market Fund/(2)/ 219,242 304,151 109,909
- ---------------------------------------------------------------------
</TABLE>
/(1)/ Commenced operations May 18, 1994.
/(2)/ 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 Funds' shareholders approved the Management Agreement on April 21,
1997. The Manage ment 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 Fund (as defined
in the Investment Company Act) and, in either case, by a majority of "non-
interested" Trustees.
29
<PAGE>
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.
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 Funds would have incurred the following additional expenses:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Prime Obligations Fund $637,605 $382,318 $ -0-
Money Market Fund 456,796 420,234 N/A
Treasury Obligations 551,885 280,395 -0-
Government Fund 352,113 197,008 98,125
Tax-Free Money Market Fund 83,097 83,376 N/A
- --------------------------
</TABLE>
Each Fund may use any name derived from the name "Goldman Sachs" only as long as
its Management Agreement remains in effect. The 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 60 days' written notice to the Trust.
In managing the Tax-Free Money Market and Municipal Money Market Funds, 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 adminis trative and economic
characteristics.
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 with the Funds.
30
<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 29, 1996, Goldman Sachs
and its consolidated subsidiaries had assets of approximately $152 billion and
partners' capital of $5.2 billion. Goldman Sachs became registered as an
investment adviser in 1981. As of March 24, 1997, Goldman Sachs, together with
its affiliates, acted as investment adviser, administrator or distributor for
approximately $104.9 billion in total assets.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED BY
- ----------------------------------------------------------------------------
GOLDMAN SACHS. The involvement of the Adviser and Goldman Sachs and their
- -------------
affiliates, in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the Adviser and
its advisory affiliates have proprietary inter ests in, and may manage or advise
with respect to, accounts or funds (including separate accounts and other funds
and collective investment vehicles) which have investment objectives similar to
those of the Funds and/or which engage in transactions in the same types of
securities, currencies and instruments as the Funds. Goldman Sachs and its
affiliates are major participants in the global currency, equities, swap and
fixed-income markets, in each case on a proprietary basis and for the accounts
of customers. As such, Goldman Sachs and its affiliates are actively engaged in
transactions in the same securities, currencies, and instruments in which the
Funds invest. Such activities could affect the prices and availability of the
securities, currencies, and instruments in which the Funds invest, which could
have an adverse impact on each Fund's performance. Such transactions,
particularly in respect of proprietary accounts or customer accounts other than
those included in the Adviser's and its advisory affiliates' asset management
activities, will be execut ed independently of the Funds' transactions and thus
at prices or rates that may be more or less favorable. When the Adviser and its
advisory affiliates seek to purchase or sell the same assets for their managed
accounts, including the Funds, the assets actually purchased or sold may be
allocated among the accounts on a basis determined in its good faith discretion
of such entitles to be equitable. In some cases, this system may adversely
affect the size or the price of the assets purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of regulatory
restrictions applicable to Goldman Sachs and its affiliates, and/or their
internal policies designed to comply with such restrictions. As a result, there
may be peri-
31
<PAGE>
ods, for example, when the Adviser, and/or its affiliates, will not initiate or
recommend certain types of transactions in certain securities or instruments
with respect to which, or in securities of issuers for which, the Adviser and/or
its affiliates are performing services or when position limits have been
reached.
In connection with their management of the Funds, the Adviser may have access to
certain fundamental analysis and proprietary technical models developed by
Goldman Sachs and other affiliates. The Adviser will not be under any
obligation, however, to effect transactions on behalf of the 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 propri
etary activities or portfolio strategies of Goldman Sachs and its affiliates or
the activities or strategies used for accounts managed by them or other customer
accounts could conflict with the transactions and strategies employed by the
Adviser in managing the Funds.
The results of each Fund's investment activities may differ significantly from
the results achieved by the 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.
An investment policy committee which may include partners of Goldman Sachs and
its affiliates may develop general policies regarding a Fund's activities, but
will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any
such member of an investment policy committee will have direct or indirect
interests in the activities of Goldman Sachs and its affiliates in securities,
currencies and investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the Adviser are
also principals or employees of Goldman Sachs or its affiliated entities. As a
result, the performance by these principals and employees of their obligations
to such other
32
<PAGE>
entities may be a consideration of which investors in the Funds
should be aware.
The Adviser may enter into transactions and invest in instruments in which
customers of Goldman Sachs serve as the counterparty, principal or issuer. In
such cases, such party's interests in the transaction will be adverse to the
interests of the Funds, and such party may have no incentive to assure that the
Funds obtain the best possible prices or terms in connection with the
transactions. Goldman Sachs and its affiliates may also create, write or issue
derivative instruments for customers of Goldman Sachs or its affiliates, the
underlying securities currencies or instruments of which may be those in which
the Funds invest or which may be based on the performance of a Fund. The Funds
may, subject to applicable law, purchase investments which are the subject of an
underwriting or other distribution by Goldman Sachs or its affiliates and may
also enter into transactions with other clients of Goldman Sachs or its
affiliates where such other clients have interests adverse to those of the
Funds. At times, these activities may cause departments of the Firm to give
advice to clients that may cause these clients to take actions adverse to the
interest of the client. To the extent affiliated transac tions are permitted,
the Funds will deal with Goldman Sachs and its affiliates on an arm's-length
basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of a Fund in order to increase the assets
of the Fund. Increasing a Fund's assets may enhance investment flexibility and
diversification and may contribute to economies of scale that tend to reduce a
Fund's expense ratio. Goldman Sachs reserves the right to redeem at any time
some or all of the shares of a Fund acquired for its own account. A large
redemption of shares of a Fund by Goldman Sachs could significantly reduce the
asset size of the Fund, which might have an adverse effect on a Fund's
investment flexibility, portfolio diversification and expense ratio. Goldman
Sachs will consider the effect of redemptions on a Fund and other shareholders
in deciding whether to redeem its shares.
PORTFOLIO TRANSACTIONS
GSAM places the portfolio transactions of the Funds and of all other accounts
managed by GSAM for execution with many firms.
33
<PAGE>
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 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.
During the fiscal year ended December 31, 1996, the Trust acquired and sold
securities of its regular broker-dealers: Shearson Lehman, Chase Manhattan, Bear
Stearns Cos., Union Bank of Switzerland, Daiwa Securities America, Inc., Morgan
Stanley, Swiss Bank Corp., Smith Barney Shearson, Salomon Brothers, Inc., and
Bankers Trust. As of December 31, 1996, each Fund held the
34
<PAGE>
following amounts of securities of its regular broker/dealers as defined in Rule
10b-1 under the Investment Company Act, or their parents ($ in thousands); Prime
Obligations Fund - Bear Stearns ($149,014), Swiss Bank Corp. ($52,981), Chase
Manhattan ($246,912), Morgan Stanley & Co., Inc. ($267,039); Government Fund -
Bear Stearns ($50,000), Morgan Stanley & Co. ($138,753), Chase Manhattan
($115,627), Swiss Bank Corp. ($62,531); Treasury Obligations Fund - Swiss Bank
Corp. ($252,384), Bear Stearns ($125,000), Lehman Brothers ($125,000), Union
Bank of Switzerland ($125,000), Chase Manhattan ($466,686), Daiwa Securities
($125,000), Morgan Stanley & Co., Inc. ($560,024), Smith Barney Inc. ($100,000);
and Money Market Fund - Swiss Bank Corp. ($36,494), Chase Manhattan ($102,482),
Morgan Stanley & Co., Inc. ($103,879).
NET ASSET VALUE
The net asset value per share of each Fund (except for Government Fund, Money
Market Plus 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, Money
Market Plus 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 have 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
35
<PAGE>
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.
The Trustees have 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 they deem 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 Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, 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 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 have 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 determine 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
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<PAGE>
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 creditors, 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
37
<PAGE>
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.
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 shares 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
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<PAGE>
the sum to the 365/7 power and subtracting one from the result, according to the
following formula:
<TABLE>
<S> <C>
Effective Yield=[(base period return + 1)/to the power of 365 divided by 7/] - 1.
</TABLE>
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 5.34 5.48 N/A
FST Administration Shares 5.09 5.23 N/A
FST Service Shares 4.84 4.98 N/A
FST Preferred Shares 5.24 5.38 N/A
Money Market Fund:
FST Shares 5.38 5.54 N/A
FST Administration Shares 5.13 5.29 N/A
FST Service Shares 4.88 5.04 N/A
FST Preferred Shares 5.28 5.44 N/A
Treasury Obligations Fund:
FST Shares 5.43 5.56 N/A
FST Administration Shares 5.18 5.31 N/A
FST Service Shares 4.93 5.06 N/A
FST Preferred Shares 5.33 5.42 N/A
Government Fund:
FST Shares 5.36 5.52 N/A
FST Administration Shares 5.11 5.27 N/A
FST Service Shares 4.86 5.02 N/A
FST Preferred Shares 5.26 5.42 N/A
Tax-Free Fund:
FST Shares 3.74 3.81 6.19
FST Administration Shares 3.49 3.56 5.78
FST Service Shares 3.24 3.31 5.36
FST Preferred Shares 3.64 3.71 6.03
</TABLE>
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<PAGE>
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, 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 5.29 5.43 N/A
FST Administration Shares 5.04 5.18 N/A
FST Service Shares 4.79 4.93 N/A
FST Preferred Shares 5.19 5.33 N/A
Money Market Fund:
FST Shares 5.35 5.49 N/A
FST Administration Shares 5.10 5.24 N/A
FST Service Shares 4.85 4.99 N/A
FST Preferred Shares 5.25 5.39 N/A
Treasury Obligations Fund:
FST Shares 5.36 5.51 N/A
FST Administration Shares 5.11 5.26 N/A
FST Service Shares 4.86 5.01 N/A
FST Preferred Shares 5.26 5.41 N/A
Government Fund:
FST Shares 5.31 5.45 N/A
FST Administration Shares 5.06 5.20 N/A
FST Service Shares 4.81 4.95 N/A
FST Preferred Shares 5.21 5.35 N/A
Tax-Free Fund:
FST Shares 3.70 3.76 6.13
FST Administration Shares 3.45 3.51 5.71
FST Service Shares 3.20 3.26 5.30
FST Preferred Shares 3.60 3.66 5.96
</TABLE>
40
<PAGE>
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 (but not limited to) Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Barron's, Business Week, Changing Times, Financial World,
Forbes, Money, Morningstar Mutual Funds, Micropol, 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 (without limitation): inflation and interest
rates, certificates of deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts and repurchase agreements. The Trust may
also compare a Fund's performance with that of other mutual funds with similar
investment objectives.
The composition of the investments in such mutual funds, comparative indices
and the characteristics of such benchmark investments are not identical to, and
in some cases are very different from, those of a Fund's portfolio. Indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may not be identical to the formulas used by a Fund to
calculate its performance data.
A Fund's performance data will be based on historical results and is not
intended to indicate future performance. A Fund's performance will vary based
on market conditions, portfolio expenses, portfolio investments and other
factors. Return for a Fund will fluctuate unlike certain bank deposits or other
investments which pay a fixed yield of return.
The Trust may also, at its discretion, from time to time make a list of a Fund's
holdings available to investors upon request. The Trust may from time to time
summarize the substance of discussions contained in shareholder reports in
advertisements and publish the Adviser's views as to markets, the rationale for
a Fund's investments and discussions of a Fund's current holdings.
In addition, from time to time, quotations from articles from financial and
other publications, such as those listed above, may be used in advertisements,
sales literature and in reports to shareholders.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed or
41
<PAGE>
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 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 gross income for the taxable year
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or certain other
investments (the "90% test"); (b) derive less than 30% of its gross income for
the taxable year from the sale or other disposition of stock, securities or
certain other investments held less than three months; and (c) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the market value of the 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 not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund's
total (gross) assets is invested in the securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the 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
42
<PAGE>
and other 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 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. Dividends paid by a Fund from the
excess of net long-term capital gain (if any) 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. At December 31, 1996, the Funds had
approximately the following amounts of capital loss carry forwards:
Years of
Amount Expiration
------ ----------
Tax Free Money Market Fund $13,000 2004
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
43
<PAGE>
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. 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, or earns other taxable
income any distributions of income from such investments or other taxable income
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 or eliminated 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 may
be entitled to claim a foreign tax credit or deduction with respect to such
taxes, subject to certain limitations under the
44
<PAGE>
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 and with certain certifications required by the Internal
Revenue Service or if the Internal 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
applicable 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, if applicable, or that the investor is an
exempt recipient. If the withholding provisions are applicable, any such
distributions, whether taken in cash or reinvested in 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.
Redemptions (including exchanges) and other dispositions of Fund shares in
transactions that are treated as sales for tax purposes will generally not
result in taxable gain or loss, provided that the Funds successfully maintain a
constant net asset value per share. Shareholers should consult their own tax
advisers with reference to their particular circumstances to determine whether a
redemption, exchange or other disposition of Fund shares is properly treated as
a sale for tax purposes.
All distributions (including exempt-interest dividends) whether received in
shares or cash, must be reported by each shareholder who is required to file a
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
45
<PAGE>
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.
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. 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 and, if a current IRS Form W-8 or acceptable substitute is not on
file with the Fund, may be subject to backup witholding on certain payments.
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 a Fund 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, intangible property 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 intangible property 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.
46
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Funds were reorganized from series of a Massachusetts business trust as
part of Goldman Sachs Trust, a Delaware business trust, under a Declaration of
Trust dated January 28, 1997 on April 30, 1997.
The Act requires that where more than one class or series of shares exists, each
class or series must be preferred over all other classes or series in respect of
assets specifically allo cated 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 Statement of Addition al Information,
the Trustees have 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 a 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 custom ers, 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, maintaining 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 mainte nance 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 0.50% of the
average daily net assets of such shares.
It is possible that an institution or its affiliates may offer different classes
of shares (i.e., FST Shares, FST Administration
47
<PAGE>
Shares, FST Service Shares or FST Preferred Shares) to its customers and thus
receive different compensation with respect to different classes of shares of
each 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 notice to shareholders, if it is deemed necessary in order to satisfy
certain tax regulatory requirements.
When issued shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transfer able and have no preemptive subscription or conversion rights.
As of the date of this Statement of Additional Information, no shares of
Municipal Fund and Plus Fund were outstanding.
As of April 1, 1997, the entities noted below may have owned beneficially 5% or
more of the outstanding shares of Prime Obligations Fund: Commerce Bank of
Kansas City, PO Box 248, Kansas City, MO 64141 (12.02%), Citicorp Trust NA as
Custodian, 400 Royal Palm Way, Palm Beach, FL 33480 (7.38%) and University of
Texas Systems, 201 W. 7th Street, Austin, TX (11.58%). As of April 1, 1997, the
entities noted below may have owned beneficially 5% or more of the outstanding
shares of Money Market Fund: Loral Corporation, 600 Third Avenue, New York, NY
10016 (9.13%), Chicago Trust Company, 171 N. Clark Street, #5CA, Chicago, IL
60601-3203(7.87%) and Citicorp Trust NA as Custodian, 400 Royal Palm Way, Palm
Beach, FL 33480 (6.50%). As of April 1, 1997, the entities noted below may have
owned beneficially 5% or more of the outstanding shares of Treasury Obligations
Fund: Commerce Bank of Kansas City, NA, PO Box 248, Kansas City, MO 64141
(11.34%), Associated Bank, P.O. Box 1007, Neehah, WI (7.98%), Amalgamated Bank
of Chicago, One West Monroe Street, Chicago, IL 60603 (6.31%), and Fulton Bank,
P.O. Box 3215, Lancaster, PA 17604 (5.52%). As of April 1, 1997, the entities
noted below may have owned beneficially 5% or more of the outstanding shares of
Government Fund: Chicago Trust Company, 171 N. Clark St., Chicago, IL 60601
(21.46%), Mellon Bank, Three Mellon Bank Center, Pittsburgh, PA 15258 (5.64%)
and Texas State Treasury, P.O. Box 12608, Austin, TX 78711 (10.35%). As of
April 1, 1997, the entities noted below may have owned beneficially 5% or more
of the outstanding shares of Tax-Free Fund: Mercantile Bank of St. Louis, N.A.,
Mandell & Company, P.O. Box 387 MPO, St. Louis, MO 63101 (10.48%), Hilliard
Lyons Trust Co., P.O. Box 32760,
48
<PAGE>
Louisville, KY 40232 (6.22%), Commerce Bank of Kansas City, P.O. Box 248, Kansas
City, MO 64141 (16.78%) and Summit Bank, P.O. Box 821, Hackensack, NJ 07602
(8.73%). As of April 1, 1997, the entities noted below may have owned
beneficially 5% or more of the outstanding shares of Federal Fund: Burlington
Bank & Trust, MATCO, P.O. Box 728, Burlington, IA 52601 (5.48%), Central
Carolina Bank & Trust Co., P.O. Box 931, Durham, NC 27702 (9.75%), Commerce Bank
NA, LENEXA, P.O. Box 419248, Kansas City, MO 64141 (5.64%), Commerce Bank of
Kansas City, P.O. Box 419248, BB4-1, Kansas City, MO 64141 (19.69%), First
National Bank of Southwestern Ohio, P.O. Box 476, Hamilton, OH 45012 (16.40%),
Mercantile Bank of St. Louis, N.A., Mandell & Company, P.O. Box 387 MPO, St.
Louis, MO 63101 (14.13%), United National Bank-NJ, Hubbell & Co., 202 Park
Avenue, Plainfield, NJ 07060 (6.28%). As of April 1, 1997, the entities noted
below may have owned beneficially 5% or more of the outstanding shares of
Treasury Instruments Fund: Central Bank & Trust Co., CEBANTCO, P.O. Box 1360,
Lexington, KY 40590 (10.48%), Chicago Trust Company, 171 N. Clark Street, #5CA,
Chicago, IL 60601 (5.06%), Harris Trust & Savings Bank, 200 W. Monroe Street,
Fl. 12, Chicago, IL 60606 (40.64%), Northern Capital Trust of Fargo, P.O. Box
829, Fargo, ND 58102 (16.70%), William Harris Investors, Inc., 2 N. LaSalle
Street, Ste. 400, Chicago, IL 60602 (22.01%).
Rule 18f-2 under the Act provides that any matter required to be submitted by
the provisions of the Act or applicable state law, or otherwise, to the holders
of the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each class or series affected
by such matter. Rule 18f-2 further provides that a class or series shall be
deemed to be affected by a matter unless the interests of each class or series
in the matter are substantially identical or the matter does not affect any
interest of such class or series. However, Rule 18f-2 exempts the selection of
independent public accountants, the approval of principal distribution contracts
and the election of directors from the separate voting requirements of Rule 18f-
2.
The Trust is not required to hold annual meetings of shareholders and does not
intend to hold such meetings. In the event that a meeting of shareholders is
held, each share of the Trust will be entitled, as determined by the Trustees,
either to one vote for each share or to one vote for each dollar of net asset
value represented by such shares on all matters presented to shareholders
including the election of Trustees (this method of voting being referred to as
"dollar based voting"). However, to the extent required by the Act or otherwise
determined by the Trustees, series and classes of the Trust will vote
separately from each other. Shareholders of the Trust do not have cumulative
voting rights in the election of Trustees. Meetings of shareholders of the
Trust, or any series or class thereof, may be called by the Trustees, certain
officers or upon the written request of holders of 10% or more of the shares
entitled to vote
49
<PAGE>
at such meetings. The shareholders of the Trust will have voting rights only
with respect to the limited number of matters specified in the Declaration of
Trust and such other matters as the Trustees may determine or may be required by
law.
The Declaration of Trust provides for indemnification of Trustees, officers and
agents of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust acting on behalf of any
affected series, must, upon request by such shareholder, assume the defense of
any claim made against such shareholder for any act or obligation of the series
and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any series
or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust, series or class; or (ii) by a majority of
the Trustees without shareholder approval if the Trustees determine that such
action is in the best interest of the Trust or its shareholders. The factors
and events that the Trustees may take into account in making such determination
include (i) the inability of the Trust or any successor series or class to
maintain its assets at an appropriate size; (ii) changes in laws or regulations
governing the Trust, series or class or affecting assets of the type in which it
invests; or (iii) economic developments or trends having a significant adverse
impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder approval
to cause the Trust, or any series thereof, to merge or consolidate with any
corporation, association, trust or other organization or sell or exchange all or
substantially all of the property belonging to the Trust or any series thereof.
In addition, the Trustees, without shareholder approval, may adopt a master-
feeder structure by investing all or a portion of the assets of a series of the
Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust
without a shareholder vote. However, shareholders of the Trust have the right
to vote on any amendment (i) that would affect the voting rights of
shareholders, (ii) that is required by law to be approved by shareholders; (iii)
50
<PAGE>
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more series or
classes of the Trust's shares (the "Series Trustees"). Series Trustees may,
but are not required to, serve as Trustees of the Trust or any other series or
class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Delaware law, the shareholders of the Funds are not gener ally subject to
liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in 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 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 provides for indemnification by the relevant
Fund for all loss suffered by a shareholder as a result of an obligation of the
Fund. The Declaration of 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 any judgment thereon. In view of the above,
the risk of personal liability of shareholders is remote.
In addition to the requirements under the Declaration of Trust, the Trust
provides that shareholders 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 Delaware law who hold at least 10% of the outstand
ing shares of the Fund, or 10% of the outstanding shares of the 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 and to employ
other advisers in considering the merit of the request and shall require an
undertaking by the shareholders making such request to reimburse the Fund for
the expense of any such advisers in the event that the Trustees determine not to
bring such action.
51
<PAGE>
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
CUSTODIAN AND SUBCUSTODIAN
State Street Bank and Trust Company ("State Street") has been retained to act as
custodian of the 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
Arthur Andersen LLP, 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, Arthur Andersen LLP 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, 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.
52
<PAGE>
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 years ended December 31, 1996 and December 31, 1995 and the
eleven months ended December 31, 1994, the amount of service fees paid by each
Fund to Service Organizations was as follows:
<TABLE>
<CAPTION>
Dec. 1996 Dec. 1995 Dec. 1994
----------- --------- ---------
<S> <C> <C> <C>
Prime Obligations Fund $ 541,076 $299,892 $115,595
Money Market Fund/(1)/ 271,936 8,447 -
Treasury Obligations Fund 849,624 584,861 168,982
Government Fund/(2)/ 1,258,434 39,940 -
Tax-Free Fund/(3)/ 91,599 70,179 1,199
</TABLE>
_______________
(1) FST Service Share activity commenced June 14, 1995.
(2) FST Service Share activity commenced May 16, 1995.
(3) FST Service Share activity commenced September 23, 1994.
53
<PAGE>
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 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 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.
54
<PAGE>
================================================================================
Goldman Sachs
1 New York Plaza
New York, NY 10004
Trustees
Ashok N. Bakhru, Chairman
David B. Ford
Alan A. Shuch
Jackson W. Smart, Jr.
William H. Springer
Richard P. Strubel
Officers
Douglas C. Grip, President
John W. Mosior, Vice President
Nancy L. Mucker, Vice President
Pauline Taylor, Vice President
Scott M. Gilman, Treasurer
John M. Perlowski, Assistant Treasurer
Michael J. Richman, Secretary
Howard B. Surloff, Assistant Secretary
Goldman Sachs
Investment Adviser, Administrator,
Distributor and Transfer Agent
Goldman Sachs
Money Market Trust
Financial Square
Funds
- -------------------------------------------------------------------
Annual Report
December 31, 1996
Prime Obligations Fund
Money Market Fund
Treasury Obligations Fund
Government Fund
Tax-Free Money Market Fund
- -------------
Goldman
Sachs
- -------------
- --------------------------------------------------------------------------------
================================================================================
<PAGE>
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Letter to Shareholders
- --------------------------------------------------------------------------------
Dear Shareholders:
We welcome this opportunity to provide you with a summary of the trends
and key events that affected the economy and the Goldman Sachs Money Market
Trust/Financial Square Funds in 1996. It was another strong year for the Funds,
during which all of the portfolios outperformed their respective IBC Financial
Data, Inc. averages during the period. Assets in the Financial Square Funds
totaled $12.2 billion as of December 31, 1996, up 34% from last year.
1996 in Review: After Easing Early in the Year, the Fed Remained Neutral Amid
Moderate Growth and Benign Inflation.
Last year began on a weak note, with the economy still in the doldrums as
harsh winter storms and a strike at General Motors continued to restrain growth.
Against that backdrop, the Federal Reserve Board (the "Fed") cut the Federal
funds rate by 25 basis points to 5.25% in January 1996, following an easing of
the same magnitude in December 1995. It soon became evident that the economy had
responded and was somewhat healthier than expected, with first-quarter real
Gross Domestic Product (GDP) at 2.0% annualized. Growth was more dramatic during
the second quarter, as industrial activity and automobile and home sales all
showed significant improvement, pushing real GDP to 4.7%, its highest rate in
two years. That growth caused some to expect the Fed to change direction and
tighten before year-end. However, the economy subsequently moderated
significantly, with third-quarter annualized real GDP retreating to 2.1%,
reflecting lackluster consumer spending and a widening U.S. trade deficit. As
1996 drew to a close, moderate economic growth and contained inflation kept the
Fed in a neutral mode, despite a very robust stock market.
Historical Yield Curve (LIBOR)
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Source: Goldman Sachs Fixed Income Database, reflecting the London Interbank
Offered Rate (LIBOR).
The Federal funds rate began the year at 5.50% and ended at 5.25%. The slope of
the LIBOR yield curve steepened significantly over the course of the year. By
the end of 1996, the spread between one- and 12-month LIBOR moved to plus 28
basis points.
A Nimble Strategy Contributed to Strong Performance
Taxable Sector. Structuring money market portfolios successfully during
1996 as the Fed shifted policy from easing to neutral to a bias to tighten
required strict attention to risk management, as well as to a detailed analysis
of market fundamentals and technicals. Analyzing the implied forward rates and
determining the extent to which the market had priced in too much easing at the
beginning of 1996 or too much tightening by midyear 1996 and then adjusting the
Funds' weighted average maturities and structures were equally important to our
strategy.
During the second and third quarters of 1996, we extended the Financial
Square Funds' weighted average maturities as the yield curve steepened in
anticipation of a Fed tightening that did not materialize. During the early part
of the fourth quarter, market data suggested that growth slowed in the third
quarter. Consequently, the market was priced to a more neutral Fed policy.
However, year-end financing pressures resulted in investment opportunities
maturing in the first quarter of 1997, and the Funds closed the year with
neutral weighted average maturities.
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Letter to Shareholders (continued)
- --------------------------------------------------------------------------------
Tax-Exempt Sector. With tax reform basically a nonissue in 1996, investor
interest in the sector revived, causing total assets in the tax-exempt money
market fund category to increase by 13%. In contrast, supply was little changed
from 1995 levels, making tax-exempts slightly more expensive in 1996. These
supply/demand technicals coupled with our fundamental view that short-term rates
were likely to rise explains our neutral to short-to-neutral weighted average
maturities during the latter part of the year.
Summary for Financial Square Funds Institutional Shares* as of 12/31/96
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Weighted
SEC 7-Day SEC 7-Day 30-Day Average
Financial Square Current Effective Average Maturity
Funds Yield Yield Yield (days)
=====================================================================
<S> <C> <C> <C> <C>
Prime
Obligations 5.34% 5.48% 5.31% 41
- --------------------------------------------------------------------
Money Market 5.38% 5.54% 5.34% 37
- --------------------------------------------------------------------
Treasury
Obligations 5.43% 5.56% 5.29% 33
- --------------------------------------------------------------------
Government 5.36% 5.52% 5.30% 36
- --------------------------------------------------------------------
Tax-Free
Money Market 3.74% 3.81% 3.42% 34
- --------------------------------------------------------------------
</TABLE>
* Financial Square Funds offer four separate classes of shares (Institutional,
Preferred, Administration and Service), each of which is subject to different
fees and expenses that affect performance and entitle shareholders to different
services. The Preferred, Administration and Service shares offer financial
institutions the opportunity to receive a fee for providing administrative
support services. The Preferred shares pay 0.10%, Administration shares pay
0.25%, and the Service shares pay 0.50%. More complete information, including
management fees and expenses, is included in the Funds' prospectus or may be
obtained by calling Goldman Sachs Funds at 1-800-621-2550.
Domestic Credit Trends Were Positive, Reflecting a Healthy Economy and a Strong
Market
Credit trends in 1996 were positive on the whole in the U.S., with steady
growth, low inflation, a booming stock market, and technological advances and
globalization transforming many industries. The major story of 1996 was the Dow
Jones Industrial Average climb of 26%, which, following the 33.5% increase in
1995, added up to a 68% growth rate since 1994.
The rising stock market supported record levels of mergers and
acquisitions. Over $650 billion in mergers, acquisitions and spin-offs were
announced in the U.S. in 1996 (up 27% from 1995), with $1.4 trillion announced
globally. This trend was spurred on not only by the stock market, but also by
deregulation in telecommunications, utilities and broadcasting. Unlike the
1980s, mergers this past year were generally equity-financed and aimed at
expanding core businesses, rather than diversifying. Merger and acquisition
activity was also utilized to boost earnings growth, since cost-cutting
opportunities had been largely exhausted during 1995.
Banks, which dominated merger activity in 1995, were busy consolidating
those mergers in 1996. It is likely that large regional domestic banks will
continue making acquisitions in 1997, although this is not expected to affect
their credit quality. At the end of the third quarter 1996, 80% of the banking
sector had a stable rating outlook.
Although consumer confidence was buoyed by low unemployment and mild
inflation, growing household debt levels led to an all-time high in credit card
loan delinquencies and personal bankruptcies. Consequently, financial results in
the consumer products, retail, restaurant and entertainment businesses were
mediocre at best. Almost all other industries, however, had improved credit
quality, with upgrades surpassing downgrades in utilities, energy, healthcare
and financial institutions. Many companies used the strength of the stock market
to substitute debt capital with equity capital, thereby improving their credit
quality.
Credit quality in the tax-exempt market was steady-to-improving during
1996. Market concerns arising from the Orange County bankruptcy abated somewhat,
although various forms of credit enhancement remained popular, even among high-
quality issuers. Reflecting the strong national economy, many states and
localities experienced positive financial results, reducing their regular cash
flow borrowings.
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Credit Picture Abroad: Europe Improved, While Asia Was Generally Stable
In Europe, developments were driven by the push towards European Monetary
Union (EMU), while the key factors in Asia were the fragile Japanese recovery
and a sharp downturn in Asian exports. In general, sovereign creditworthiness
improved during 1996. This was particularly the case in Europe, where the
political will to qualify for EMU produced significant improvements in fiscal
policy and debt dynamics, as it sparked more rapid corporate restructuring.
French and Italian banks did require close monitoring this year as their problem
loans continued, but French bank credit quality stabilized after having suffered
broad rating downgrades in 1995. The credit quality of most other European banks
was stable, with a few minor downgrades of German and Swiss banks.
In Asia, creditworthiness was fairly stable. The notable negative
exception was the Japanese financial sector, which remained under pressure from
the ongoing weakness of the real estate markets, sluggish economic growth and
ongoing deregulation. However, Japan's largest banks have strong fundamentals
and will continue to be important and dominant players in the global financial
market. Australian credit quality strengthened through improved macroeconomic
balances, which provided evidence that Australia's recent boom-and-bust cycles
may be over. The weakness of Asian exports did not affect creditworthiness
directly; exports should recover this year, and the scare could prompt salutary
policy adjustments going forward.
In 1996, we continued to apply conservative credit standards to our money
market Funds. The Goldman Sachs Credit Department, which has analysts based in
London, Tokyo, Frankfurt and New York, as well as extensive technological assets
and credit expertise, will continue to vigilantly monitor global developments.
Outlook and Strategies for 1997
Fourth-quarter 1996 GDP was reported at 4.7%, reflecting a stronger
economic picture from several sources: a sharp narrowing of the U.S. trade
deficit, as well as increases in consumer spending and industrial production.
Goldman Sachs' economists expect economic growth to continue at just under 2.0%
for the first quarter of 1997 and at approximately 3.0% for the full year. As a
result, Goldman Sachs currently believes the Fed is likely to raise short-term
interest rates by midyear.
Consequently, the Financial Square Funds will continue to be managed with
short-to-neutral average life targets and short, laddered structures to prepare
for the probability of higher rates ahead.
Extended Trading Hours Improve Service Further
To meet the needs of many institutional investors who receive inflows of
cash late in the day, we extended the trading hours for both purchases and
redemptions in the Financial Square Treasury Obligations Fund until 5:00 p.m.
EST. (The Financial Square Government Fund also provides late-day service.) We
have found many of our clients enjoy the added flexibility of late-day trading
and are increasing their use of this beneficial service.
In closing, we thank you for your support and for making 1996 a successful
year for the Financial Square Funds. We are pleased that many of you have joined
our conference calls following each Federal Open Market Committee meeting
throughout the year. Our goal is to continue to provide you with competitive
performance, as well as a range of value-added services that reflect the breadth
and depth of Goldman Sachs' outstanding resources.
Sincerely,
/s/ Kaysie P. Uniacke
- ---------------------
Kaysie P. Uniacke
Portfolio Manager
February 7, 1997
- --------------------------------------------------------------------------------
3
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations--53.0%
Bank Holding Companies
BankAmerica Corp.
$150,000,000 5.27% 03/21/97 $ 148,265,292
Chase Manhattan Corp.
100,000,000 5.28 03/14/97 98,944,000
JP Morgan & Co., Inc.
25,000,000 5.73 05/30/97 24,407,104
NationsBank Corp.
50,000,000 5.40 05/09/97 49,040,000
Business Credit Institutions
General Electric Capital Corp.
50,000,000 5.30 03/26/97 49,381,667
100,000,000 5.44 04/03/97 98,609,778
JC Penney Funding Corp.
50,000,000 5.31 01/31/97 49,778,750
Commercial Banks
CP Trust Certificates Series 1996
85,000,000 5.68/(a)/ 03/28/97 85,000,000
Financial Services
National Rural Utilities Cooperative
34,250,000 5.30 02/11/97 34,043,263
62,000,000 5.28 02/21/97 61,536,240
Life Insurance
Commonwealth Life Insurance Co.
20,000,000 5.64/(b)/ 05/08/97 20,000,000
Pacific Mutual Life Insurance Co.
50,000,000 5.52/(b)/ 02/28/97 50,000,000
Prudential Funding Corp.
50,000,000 6.50 01/02/97 49,990,972
50,000,000 5.43 02/28/97 49,562,583
Motor Vehicles and Equipment
Ford Motor Credit Co.
150,000,000 5.31 02/04/97 149,247,750
Personal Credit Institutions
Associates Corp. of North America
50,000,000 6.30 01/02/97 49,991,250
50,000,000 5.32 01/30/97 49,785,722
50,000,000 5.32 01/31/97 49,778,333
Household Finance Corp.
50,000,000 5.32 03/12/97 49,482,778
Transamerica Finance Corp.
10,000,000 5.52 01/28/97 9,958,600
50,000,000 5.43 02/28/97 49,562,584
21,000,000 5.29 03/13/97 20,780,906
31,308,000 5.29 03/14/97 30,976,761
USAA Capital Corp.
30,000,000 5.34 04/07/97 29,572,800
Receivable/Asset Financings
Beta Finance Inc.
16,000,000 5.58 01/27/97 15,935,520
24,000,000 5.58 02/03/97 23,877,240
15,000,000 5.50 02/04/97 14,922,083
19,000,000 5.35 04/07/97 18,728,933
25,000,000 6.11 06/17/97 25,000,000
Delaware Funding Corp.
30,832,000 5.29 02/20/97 30,605,470
Enterprise Funding Corp.
50,000,000 5.33 01/23/97 49,837,139
International Lease Finance Corp.
60,000,000 5.30 03/17/97 59,337,500
20,000,000 5.29 03/24/97 19,759,011
New Center Asset Trust
25,000,000 5.52 01/28/97 24,896,500
25,000,000 5.37 04/04/97 24,653,188
Security and Commodity Brokers, Dealers and Services
Bear Stearns Companies, Inc.
100,000,000 5.30 02/13/97 99,366,945
50,000,000 5.30 02/18/97 49,646,667
C.S. First Boston, Inc.
60,000,000 5.33 01/22/97 59,813,450
Merrill Lynch & Co., Inc.
50,000,000 5.35 02/11/97 49,695,347
25,000,000 5.45 02/19/97 24,814,549
75,000,000 5.33 02/26/97 74,378,167
Morgan Stanley Group, Inc.
40,000,000 5.59 01/28/97 39,832,300
50,000,000 5.41 02/03/97 49,752,042
20,000,000 5.32 02/06/97 19,893,600
40,000,000 5.53 06/27/97 40,000,000
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Prime Obligations Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Commercial Paper and Corporate Obligations (continued)
Telecommunications
Ameritech Corp.
$ 70,000,000 5.34% 04/07/97 $ 69,003,200
Tobacco
Philip Morris Co.
70,000,000 6.50 01/02/97 69,987,361
- -------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $2,311,433,345
- -------------------------------------------------------------------
Bank Notes--15.6%
Dakota Certificates of Standard Credit Card Master Trust
$ 50,000,000 5.33%(b) 02/07/97 $ 49,726,097
FCC National Bank
40,000,000 5.70 05/22/97 39,953,925
75,000,000 6.00 06/02/97 75,003,030
First Bank FSB
50,000,000 5.62(b) 02/11/97 50,000,000
20,000,000 5.61(b) 04/11/97 19,998,937
First National Bank of Maryland
20,000,000 5.60(b) 09/30/97 19,994,187
Harris Trust & Savings Bank
16,500,000 6.04 06/17/97 16,520,097
Household Bank FSB
50,000,000 5.63(b) 09/23/97 49,997,602
Huntington National Bank
35,000,000 6.05 06/13/97 35,042,420
PNC Bank, N.A.
58,500,000 5.58(b) 04/01/97 58,488,742
100,000,000 5.40(b) 10/01/97 99,941,219
Society National Bank of Cleveland
100,000,000 5.58 05/14/97 99,961,237
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
25,000,000 5.54(b) 05/15/97 24,995,313
- -------------------------------------------------------------------
Total Bank Notes $ 679,622,806
- -------------------------------------------------------------------
U.S. Government Agency Obligations--7.1%
Federal Farm Credit Bank
32,000,000 5.39 02/24/97 31,741,280
Federal Home Loan Mortgage Corp.
50,000,000 5.40 02/24/97 49,595,000
Federal National Mortgage Association
$200,000,000 5.36% 03/04/97 $ 198,153,778
30,000,000 5.35 03/17/97 29,665,625
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 309,155,683
- -------------------------------------------------------------------
Certificates of Deposit--6.9%
Chase Manhattan Corp.
$ 25,000,000 5.75% 02/03/97 $ 25,000,000
25,000,000 5.42 03/12/97 25,000,000
Mellon Bank, N.A.
50,000,000 5.35 02/19/97 50,000,000
100,000,000 5.50 04/07/97 100,000,000
Morgan Guaranty Trust Co.
50,000,000 5.65 02/03/97 50,000,445
Union Bank of California
50,000,000 5.58 02/28/97 50,000,000
- -------------------------------------------------------------------
Total Certificates of Deposit $ 300,000,445
- -------------------------------------------------------------------
Repurchase Agreements--17.7%
C.S. First Boston Corp., dated 12/31/96, repurchase price
$302,790,000 (FNMA: $308,478,596, 6.00%-6.18%, 02/01/09-04/01/34)
$300,000,000 5.40% 03/03/97 $ 300,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $102,538,618, 5.47%, 12/30/97)
100,000,000 6.50 01/02/97 100,000,000
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$75,641,250 (FNMA: $78,669,875, 7.50%, 04/01/26)
75,000,000 5.40 02/26/97 75,000,000
Joint Repurchase Agreement Account
297,900,000 6.58 01/02/97 297,900,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 772,900,000
- -------------------------------------------------------------------
Total Investments $4,373,112,279/(c)/
===================================================================
/(a)/Variable rate security - base index is either U.S. Treasury
Bill, one or three month LIBOR, one month commercial paper,
Federal Funds or Prime lending rate
/(b)/Variable rate master note-base index is Federal Funds.
/(c)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices. The percentages shown for each
investment category reflect the value of investments in that
category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Money Market Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Commercial Paper and Corporate Obligations--45.7%
Commercial Banks
CP Trust Certificates Series 1996
$ 60,000,000 5.68%\(a)\ 03/28/97 $ 60,000,000
Computer Software and Services
First Data Corp.
20,000,000 5.40 02/19/97 19,853,000
Siemens Capital Corp.
25,000,000 5.32 02/13/97 24,841,139
Foreign Banks
ABN Amro N.A.
50,000,000 5.45 02/28/97 49,560,972
Banca Crt Financial Corp.
15,000,000 5.35 01/31/97 14,933,125
22,945,000 5.42 04/01/97 22,634,095
20,000,000 5.47 04/03/97 19,720,422
13,000,000 5.42 04/08/97 12,810,149
BBL North America
125,000,000 6.90 01/02/97 124,976,042
Bex America, Inc.
36,000,000 5.36 01/21/97 35,892,900
Generale Bank
70,000,000 5.35 04/10/97 68,970,125
Nordbanken, N.A.
42,559,000 6.50 01/10/97 42,489,842
Royal Bank of Canada
100,000,000 6.50 01/02/97 99,981,944
San Paolo U.S. Finance Corp.
25,000,000 5.36 01/31/97 24,888,333
Swedbank, Inc.
100,000,000 5.47 02/04/97 99,483,389
Unifunding, Inc.
60,000,000 5.45 01/29/97 59,745,667
50,000,000 5.36 04/07/97 49,285,333
Life Insurance
Sunamerica Life Insurance Co.
50,000,000 5.50\(b)\ 09/02/97 50,000,000
Mortgage Brokers
Countrywide Funding Corp.
28,700,000 5.35 01/23/97 28,606,167
27,000,000 5.35 01/28/97 26,891,663
Countrywide Home Loans
50,000,000 6.65 01/02/97 49,990,764
Motor Vehicles and Equipment
Daimler Benz Corp., N.A.
16,312,000 5.57% 01/14/97 16,279,190
30,000,000 5.60 01/16/97 29,930,000
10,000,000 5.35 03/25/97 9,876,653
55,000,000 5.35 03/26/97 54,313,417
General Motors Acceptance Corp.
20,000,000 5.57 02/04/97 19,894,789
50,000,000 5.47 04/07/97 49,270,667
Security and Commodity Brokers, Dealers and Services
Merrill Lynch & Co., Inc.
25,000,000 5.35 02/11/97 24,847,674
25,000,000 5.45 02/19/97 24,814,549
50,000,000 5.33 02/26/97 49,585,444
Morgan Stanley Group, Inc.
22,900,000 5.53\(a)\ 06/27/97 22,900,000
Nomura Holdings
15,000,000 5.39 01/28/97 14,939,363
50,000,000 5.39 01/30/97 49,782,903
- --------------------------------------------------------------------
Total Commercial Paper and Corporate
Obligations $1,351,989,720
- --------------------------------------------------------------------
Bank Notes--15.1%
Dakota Certificates of Standard Credit Card Master Trust
$ 25,000,000 5.33%\(b)\ 02/07/97 $ 24,863,049
FCC National Bank
25,000,000 5.70 05/22/97 24,971,203
50,000,000 6.00 06/02/97 50,002,020
First Bank FSB
75,000,000 5.61\(b)\ 04/11/97 74,996,012
First National Bank of Maryland
30,000,000 5.61\(b)\ 09/26/97 29,991,409
25,000,000 5.60\(b)\ 09/30/97 24,992,734
Household Bank FSB
25,000,000 5.63\(b)\ 09/23/97 24,998,185
Huntington National Bank
10,000,000 6.05 06/13/97 9,996,458
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Money Market Fund (continued)
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
====================================================================
Bank Notes (continued)
PNC Bank, N.A.
$ 42,000,000 5.46%(b) 09/03/97 $ 41,977,353
50,000,000 5.40(b) 10/01/97 49,970,608
SMM Trust 1996
40,000,000 5.69(b) 06/20/97 40,000,000
Southtrust Bank of Alabama, N.A.
50,000,000 5.45(b) 07/11/97 49,983,901
- --------------------------------------------------------------------
Total Bank Notes $ 446,742,932
- --------------------------------------------------------------------
Certificates of Deposit--1.2%
Chase Manhattan Corp.
$ 35,000,000 5.75% 02/03/97 $ 35,000,000
- --------------------------------------------------------------------
Total Certificates of Deposit $ 35,000,000
- --------------------------------------------------------------------
Certificates of Deposit - Foreign Eurodollar--7.6%
Norinchukin Bank, London
$125,000,000 5.49% 03/18/97 $ 125,002,592
Sanwa Bank Ltd., London
100,000,000 5.46 03/21/97 100,001,079
- --------------------------------------------------------------------
Total Certificates of Deposit - Foreign Eurodollar $ 225,003,671
- --------------------------------------------------------------------
Certificates of Deposit - Yankeedollar--12.3%
Fuji Bank, Chicago
$100,000,000 5.52% 01/17/97 $ 100,000,441
Industrial Bank of Japan, New York
100,000,000 5.46 03/19/97 100,001,051
Landesbank Hessen Thuer Gir, New York
50,000,000 6.03 06/13/97 50,060,885
Sumitomo Bank, Los Angeles
75,000,000 5.52 02/28/97 74,994,514
Westpac Banking Corp., New York
40,000,000 5.97 06/06/97 40,027,198
- --------------------------------------------------------------------
Total Certificates of Deposit - Yankeedollar $ 365,084,089
- --------------------------------------------------------------------
Time Deposit--2.9%
Bank of Tokyo, Mitsubishi Bank Ltd., London
$ 85,000,000 5.50% 05/16/97 $ 85,000,000
- --------------------------------------------------------------------
Total Time Deposit $ 85,000,000
- --------------------------------------------------------------------
Repurchase Agreements--15.4%
JP Morgan Securities, Inc., dated 12/31/96, repurchase price
$100,036,111 (FNMA: $69,839,000, 5.47%, 12/30/97; FHLMC:
$32,517,875, 7.26%, 09/17/01)
$100,000,000 6.50% 01/02/97 $ 100,000,000
SBC Government Securities, Inc., dated 12/31/96, repurchase price
$150,052,083 (FNMA Stripped Securities: $149,437,500, 01/23/97;
FNMA: $3,650,246, 6.50%, 08/15/97)
150,000,000 6.25 01/02/97 150,000,000
Joint Repurchase Agreement Account
205,200,000 6.58 01/02/97 205,200,000
- --------------------------------------------------------------------
Total Repurchase Agreements $ 455,200,000
- --------------------------------------------------------------------
Total Investments $2,964,020,412(c)
================================================================================
(a) Variable rate security - base index is either U.S. Treasury Bill, one or
three month LIBOR, one month commercial paper, Federal Funds or Prime
lending rate
(b) Variable rate master note-base index is Federal Funds.
(c) The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Treasury Obligations Fund
December 31, 1996
- --------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
=====================================================================
U.S. Treasury Obligations--8.5%
United States Treasury Notes
$ 100,000,000 5.63% 06/30/97 $ 99,831,980
30,000,000 6.00 09/02/97 29,991,342
92,500,000 5.38 12/01/97 92,370,356
40,000,000 5.25 12/31/97 39,901,534
- --------------------------------------------------------------------
Total U.S. Treasury Obligations $ 262,095,212
====================================================================
Repurchase Agreements--91.9%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$125,046,875 (U.S. Treasury Notes: $127,384,047, 5.75%-5.88%,
10/31/98-12/31/98)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
C.S. First Boston Corp., dated 12/13/96, repurchase price
$101,332,500 (U.S. Treasury Note: $102,491,792, 5.50%,
11/15/98)
100,000,000 5.33 03/13/97 100,000,000
CIBC Wood Gundy Securities, dated 12/31/96, repurchase price
$125,046,528 (U.S. Treasury Bond: $71,136,658, 8.50%,
02/15/20; U.S. Treasury Note: $56,365,266, 7.25%, 08/15/04)
125,000,000 6.70 01/02/97 125,000,000
Daiwa Securities, dated 12/31/96, repurchase price $125,047,917
(U.S. Treasury Bill: $127,500,528, 11/13/97)
125,000,000 6.90 01/02/97 125,000,000
Goldman, Sachs & Co., dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Bill: $127,500,296, 12/11/97)
125,000,000 6.60 01/02/97 125,000,000
JP Morgan Securities, dated 12/31/96, repurchase price
$125,045,833 (U.S. Treasury Notes: $127,371,815, 6.88%-7.75%,
12/31/99-11/15/01)
125,000,000 6.60 01/02/97 125,000,000
Lehman Government Securities, Inc., dated 12/31/96, repurchase
price $125,049,306 (U.S. Treasury Stripped Securities:
$127,500,543, 02/15/97-11/15/03)
125,000,000 7.10 01/02/97 125,000,000
Merrill Lynch Government Securities, Inc., dated 12/31/96,
repurchase price $125,044,792 (U.S. Treasury Bills:
$70,594,041, 01/09/97-01/30/97; U.S. Treasury Stripped
Securities: $14,626,460, 08/15/98-11/15/99; U.S. Treasury
Notes: $42,283,899, 7.50%-9.25%, 05/15/97-11/15/01)
125,000,000 6.45 01/02/97 125,000,000
Nomura Securities International, Inc., dated 12/12/96, repurchase
price $101,335,000 ( U.S. Treasury Bill: $9,629,890, 09/18/97;
U.S. Treasury Notes: $92,371,056, 5.00%-8.13%, 05/31/97-05/31/01)
100,000,000 5.34 03/12/97 100,000,000
Repurchase Agreements (continued)
Sanwa Securities, dated 12/31/96, repurchase price $125,046,875
(U.S. Treasury Notes: $85,107,798, 4.75%-5.25%,
08/31/98-04/30/01; U.S. Treasury Bill: $40,971,000, 10/16/97)
$ 125,000,000 6.75% 01/02/97 $ 125,000,000
Smith Barney, Inc., dated 12/11/96, repurchase price $101,335,000
(U.S. Treasury Bill: $1,475,971, 03/13/97; U.S. Treasury
Stripped Security: $ 15,052,048, 02/15/98; U.S. Treasury
Notes: $85,472,470, 4.75%-7.88%, 02/15/97-04/15/98)
100,000,000 5.34 03/11/97 100,000,000
UBS Securities, Inc., dated 12/31/96, repurchase price
$125,047,743 (U.S. Treasury Notes: $127,294,387, 6.13%-7.75%,
05/31/97-11/15/01)
125,000,000 6.88 01/02/97 125,000,000
Joint Repurchase Agreement Account
1,419,100,000 6.58 01/02/97 1,419,100,000
- --------------------------------------------------------------------
Total Repurchase Agreements $2,844,100,000
====================================================================
Total Investments $3,106,195,212/(a)/
====================================================================
/(a)/The amount stated also represents aggregate cost for federal income tax
purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rate indices.
The percentages shown for each investment category reflects the value of the
investments in that category as a percentage of total net assets.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Government Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
U.S. Government Agency Obligations--44.7%
Federal Home Loan Bank
$ 35,000,000 5.40%(a) 04/04/97 $ 34,991,708
15,000,000 5.45 11/12/97 14,986,333
20,000,000 5.42 12/02/97 19,973,237
50,000,000 5.50(a) 12/26/97 49,959,182
Federal National Mortgage Association
72,000,000 5.35 01/21/97 71,786,000
25,000,000 5.35 01/24/97 24,914,549
20,000,000 5.27(a) 04/04/97 19,985,729
75,000,000 4.75(a) 04/21/97 74,974,867
100,000,000 5.43(a) 09/12/97 99,940,710
50,000,000 5.41(a) 09/29/97 49,981,540
12,500,000 5.53 10/29/97 12,495,125
75,000,000 5.40(a) 12/03/97 74,952,900
- -------------------------------------------------------------------
Total U.S. Government Agency Obligations $ 548,941,880
- -------------------------------------------------------------------
U.S. Treasury Obligations--6.5%
United States Treasury Notes
$ 50,000,000 5.63% 06/30/97 $ 49,915,080
30,000,000 6.00 09/02/97 29,990,027
- -------------------------------------------------------------------
Total U.S. Treasury Obligations $ 79,905,107
- -------------------------------------------------------------------
Repurchase Agreements--49.0%
Bear Stearns Companies, Inc., dated 12/31/96, repurchase price
$50,018,889 (FNMA: $51,422,558, 7.00%, 12/01/11-04/01/24)
$ 50,000,000 6.80% 01/02/97 $ 50,000,000
C.S. First Boston Corp., dated 12/11/96, repurchase price
$50,671,875 (FHLMC: $52,596,865, 7.00%, 11/01/26)
50,000,000 5.38 03/11/97 50,000,000
Goldman, Sachs & Co., dated 12/11/96, repurchase price
$50,671,875 (FNMA: $51,607,046, 6.12%, 10/01/32)
50,000,000 5.38 03/11/97 50,000,000
JP Morgan Securities, Inc., dated 12/12/96, repurchase price
$50,671,875 (FNMA: $52,512,714, 7.50%, 06/01/26)
50,000,000 5.38 03/12/97 50,000,000
Nomura Securities International, Inc., dated 12/31/96, repurchase
price $50,020,833 (FNMA: $34,860,373, 6.50%, 07/01/24; FHLMC:
$16,396,948, 7.00%-8.00%, 12/01/22-12/01/26)
50,000,000 7.50 01/02/97 50,000,000
Joint Repurchase Agreement Account
351,600,000 6.58 01/02/97 351,600,000
- -------------------------------------------------------------------
Total Repurchase Agreements $ 601,600,000
- -------------------------------------------------------------------
Total Investments $1,230,446,987/(b)/
===================================================================
/(a)/Variable rate security-base index is either Federal Funds, Prime
lending rate or one month LIBOR.
/(b)/The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized
yield on date of purchase for discounted notes, or, for floating
rate securities, the current reset rate, which is based upon
current interest rate indices.
The percentages shown for each investment category reflect the value
of investments in that category as a percentage of total net assets.
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Alabama--4.8%
Columbia IDB PCRB for Alabama Power Co. Series 1995 (A-1/VMIG1)
$ 1,500,000 5.00% 01/01/97 $ 1,500,000
Jefferson County MF Hsg. Refunding RB for Hickory Knolls Project
Series 1994 (Amsouth Bank LOC)(P-1)
4,040,000 4.25 01/07/97 4,040,000
Jefferson County Sewer Revenue Warrants Series 1995 A (Bayerische
Landesbank Girozentrale LOC)(A-1+/VMIG1)
18,200,000 4.25 01/07/97 18,200,000
Parrish IDB PCRB for Alabama Power Co. Series 1994 A(A-1+/VMIG1)
2,150,000 5.00 01/01/97 2,150,000
- -------------------------------------------------------------------
$25,890,000
- -------------------------------------------------------------------
Arizona--1.4%
Maricopa County PCRB for Southern California Edison Co.
Series 1985 C(A-1/P-1)
$ 6,450,000 3.60% 03/12/97 $ 6,450,000
Phoenix IDA MF Hsg. VRDN for Del Mar Terrace Apartments (Bank of
America LOC)(MIG1)
1,300,000 4.15 01/07/97 1,300,000
- -------------------------------------------------------------------
$ 7,750,000
- -------------------------------------------------------------------
Arkansas--0.8%
Crossett City PCRB for Georgia Pacific Corp. Series 1991(Suntrust
Bank LOC)(A-1/P-1)
$ 4,500,000 4.15% 01/07/97 $ 4,500,000
- -------------------------------------------------------------------
California--5.0%
California RANS Index Series 1996-97 B(SP-1+/MIG1)
$16,000,000 3.47% 01/31/97 $16,000,000
California RANS VRDN Series 1996-97(SP-1+/VMIG1)
4,300,000 4.00 01/07/97 4,300,000
California School Cash Reserve Program Authority Series 1996
(MBIA)(MIG1)
4,500,000 4.50 12/19/97 4,537,690
Los Angeles County TRANS Series 1996-97 A(Credit Suisse/Morgan
Guaranty/Westdeutsche Landesbank Girozentrale/Bank of America/
Union Bank of Switzerland LOC)(SP-1/MIG1)
2,080,000 4.50 01/07/97 2,087,107
- -------------------------------------------------------------------
$26,924,797
- -------------------------------------------------------------------
Colorado--1.0%
Colorado Health Facilities Authority Series 1992 C(A-1+/VMIG1)
$ 5,500,000 4.15% 01/07/97 $ 5,500,000
- -------------------------------------------------------------------
District of Columbia--1.1%
District of Columbia VRDN ACES Series 1988 C (Bayerische
Landesbank Girozentrale LOC)(A-1/VMIG1)
$ 6,100,000 4.10% 01/07/97 $ 6,100,000
- -------------------------------------------------------------------
Florida--4.6%
Dade County Water & Sewer RB Series 1994 (FGIC)(A-1/VMIG1)
$ 3,700,000 4.00% 01/07/97 $ 3,700,000
Florida Local Government Pooled CP Notes (First Union National
Bank of Florida LOC)(A-1/P-1)
11,617,735 3.70 01/30/97 11,617,735
Jacksonville PCRB for Florida Power & Light Co. Series 1995
(A-1+/VMIG1)
600,000 5.25 01/01/97 600,000
Putnam County Development Authority for Seminole Electric Series
1984 H VRDN (CFC)(A-1+/P-1)
9,100,000 4.15 01/07/97 9,100,000
- -------------------------------------------------------------------
$25,017,735
- -------------------------------------------------------------------
Georgia--6.8%
Bartow County PCRB for Georgia Power Co. Series 1996(VMIG1)
$ 5,800,000 5.25% 01/01/97 $ 5,800,000
Burke County PCRB for Georgia Power Co. Second Series 1995
(A-1/VMIG1)
800,000 5.00 01/01/97 800,000
Burke County PCRB for Georgia Power Co. Series 1994(VMIG1)
3,800,000 5.00 01/01/97 3,800,000
Burke County PCRB for Georgia Power Co. Series 1995(A+/VMIG1)
3,400,000 5.00 01/01/97 3,400,000
6,300,000 5.25 01/01/97 6,300,000
Floyd County PCRB for Georgia Power Co. Series 1996(A-1/VMIG1)
3,000,000 5.00 01/01/97 3,000,000
Monroe County Development Authority for Georgia Power Scherer
Project Series 1995(A-1/VMIG1)
3,300,000 5.00 01/01/97 3,300,000
Municipal Electric Authority of Georgia Subordinate General
Resolution Series 1985 B(Credit Suisse/Morgan
Guaranty/Bayerische Landesbank Girozentrale LOC)(A-1+/VMIG1)
4,575,000 3.55 03/06/97 4,575,000
6,000,000 3.55 04/10/97 6,000,000
- -------------------------------------------------------------------
$36,975,000
- -------------------------------------------------------------------
Hawaii--0.7%
Hawaii Housing Finance and Development Authority MF Hsg.VRDN
Series 1985 A(FHLB LOC)(A-1+)
$ 4,000,000 3.00% 01/07/97 $ 4,000,000
- -------------------------------------------------------------------
- -------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
10
<PAGE>
Statement of Investments
- ---------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Illinois--8.3%
Illinois Health Facilities Authority VRDN for Elmhurst Memorial
Hospital Series 1993 B(VMIG1)
$ 8,900,000 5.30% 01/01/97 $ 8,900,000
Illinois Health Facilities Authority VRDN for Evangelical
Hospitals Corp. Series 1985 A (First National Bank of Chicago
LOC)(VMIG1)
2,600,000 4.10 01/07/97 2,600,000
Illinois Health Facilities Authority VRDN for Healthcorp
Affiliates Projects Series 1985 A (Northern Trust Company
LOC)(VMIG1)
2,700,000 4.15 01/07/97 2,700,000
Illinois Health Facilities Authority VRDN RB for Northwest
Community Hospital Series 1995 (A-1+/VMIG1)
5,000,000 4.20 01/01/97 5,000,000
Illinois Health Facilities Authority VRDN for Resurrection
Healthcare(VMIG1)
6,000,000 5.00 01/01/97 6,000,000
Illinois Health Facilities Authority VRDN Series 1985 C and D
Revolving Fund Pooled Finance Program (First National Bank of
Chicago LOC)(A-1/VMIG1)
16,700,000 4.15 01/07/97 16,700,000
Sauget PCRB VRDN for Monsanto Series 1992(P-1)
1,000,000 4.20 01/07/97 1,000,000
Sauget PCRB VRDN for Monsanto Series 1993(P-1)
1,900,000 4.20 01/07/97 1,900,000
- -------------------------------------------------------------------
$44,800,000
- -------------------------------------------------------------------
Indiana--5.1%
Fort Wayne Hospital Authority VRDN for Parkview Memorial Hospital
Series 1985 B (Bank of America LOC)(VMIG1)
$ 8,100,000 4.15% 01/07/97 $ 8,100,000
Indiana Hospital Equipment Financing Authority VRDN Series 1985 A
(MBIA)(A-1/VMIG1)
2,500,000 4.20 01/07/97 2,500,000
Jasper County PCRB for Nipsco Series 1994 A and C(A-1+/VMIG1)
9,300,000 5.10 01/01/97 9,300,000
Warrick County PCRB for Aluminum Company of America Series
1992(A-1)
7,475,000 4.15% 01/07/97 7,475,000
- -------------------------------------------------------------------
$27,375,000
- -------------------------------------------------------------------
Iowa--2.0%
Chillicothe PCRB for Midwest Power Systems Series 1993 A
(A-1/VMIG1)
$ 3,700,000 4.15% 01/07/97 $ 3,700,000
Muscatine County VRDN for Monsanto Corp. Series 1992(P-1)
7,200,000 4.20 01/07/97 7,200,000
- -------------------------------------------------------------------
$10,900,000
- -------------------------------------------------------------------
Kentucky--0.6%
Calvert PCRB for Air Products and Chemicals, Inc. Project Series
1993 A(A-1)
$ 3,000,000 4.20% 01/07/97 $ 3,000,000
- -------------------------------------------------------------------
Maryland--2.1%
Anne Arundel County RB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
$ 1,000,000 3.65% 03/10/97 $ 1,000,000
5,380,000 3.60 03/13/97 5,380,000
Baltimore County PCRB for Baltimore Gas & Electric Series 1985
(A-1/VMIG1)
5,000,000 3.70 01/15/97 5,000,000
- -------------------------------------------------------------------
$11,380,000
- -------------------------------------------------------------------
Massachusetts--0.7%
Massachusetts Bay Transportation Authority Series 1996 A Notes
(SP-1/MIG2)
$ 4,000,000 3.75% 02/28/97 $ 4,002,951
- -------------------------------------------------------------------
Michigan--1.0%
Michigan Job Development Authority VRDN for Mazda Motor
Manufacturing Series 1985 (Sumitomo Bank)(VMIG1)
$ 1,400,000 4.25% 01/07/97 $ 1,400,000
Michigan State Strategic Fund Ltd. RB for Dow Chemical Series 1994
(A-1/P-1)
4,200,000 5.10 01/01/97 4,200,000
- -------------------------------------------------------------------
$ 5,600,000
- -------------------------------------------------------------------
Minnesota--1.9%
Minnesota State Higher Education Facility VRDN for Carleton
College Series 3-L2(VMIG1)
$ 6,000,000 4.11% 01/07/97 $ 6,000,000
Port Authority of St. Paul VRDN for Weyerhauser Project Series 1993
(A-1)
4,000,000 4.21 01/07/97 4,000,000
- -------------------------------------------------------------------
$10,000,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
Statement of Investments
- --------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Mississippi--0.6%
Grenada County Refunding RB VRDN for Georgia Pacific Corp. Series
1994 (Sumitomo Bank LOC)(A1/P-1)
$ 1,000,000 4.30% 01/07/97 $ 1,000,000
Jackson County PCRB for Chevron USA, Inc. Series 1992(VMIG1)
2,000,000 5.00 01/01/97 2,000,000
- -------------------------------------------------------------------
$ 3,000,000
- -------------------------------------------------------------------
Missouri--1.1%
Missouri Health & Educational Facility Authority VRDN for SSM
Health Care Series 1995 B (MBIA)(AAA)
$ 4,500,000 4.10% 01/07/97 $ 4,500,000
Missouri State Environmental Improvement & Energy Resources
Authority VRDN for Monsanto Corp. Series 1993(P-1)
1,500,000 4.20 01/07/97 1,500,000
- -------------------------------------------------------------------
$ 6,000,000
- -------------------------------------------------------------------
New Jersey--3.1%
State of New Jersey TRANS Series 1997 A(A-1+/P-1)
$17,000,000 3.50% 03/11/97 $17,000,000
- -------------------------------------------------------------------
New Mexico--0.9%
Albuquerque RB for Sisters of Charity Series 1992(A-1+/VMIG1)
$ 5,000,000 4.15% 01/07/97 $ 5,000,000
- -------------------------------------------------------------------
New York--9.5%
Great Neck North Water Authority Water System RB Series 1993 A
(FGIC)(A-1+/VMIG1)
$ 3,400,000 4.00% 01/07/97 $ 3,400,000
New York City GO Series 1994 B (Morgan Guaranty LOC)(A-1/VMIG1)
2,800,000 4.50 01/01/97 2,800,000
New York City GO RANS Series 1997 A(SP-1+/VMIG1)
26,000,000 4.50 04/15/97 26,060,135
New York City Municipal Water Finance Authority CP Notes Series 3
(Toronto Dominion Bank/Bank of Nova Scotia LOC)(A-1+/P-1)
7,500,000 3.50 03/11/97 7,500,000
New York City Municipal Water Finance Authority RB Series 1995 A
(FGIC)(A-1+/VMIG1)
2,900,000 4.70 01/01/97 2,900,000
New York State Local Government VRDN Series 1995 C (Landesbank
Hessen-Thueringen Girozentrale LOC)(A-1+/VMIG1)
3,900,000 4.00 01/07/97 3,900,000
New York State Local Government VRDN Series 1995 G (National
Westminster Bank LOC)(A-1+/MIG1)
4,550,000 3.85 01/07/97 4,550,000
- -------------------------------------------------------------------
$51,110,135
- -------------------------------------------------------------------
North Carolina--6.8%
Rockingham County PCRB for Philip Morris Company Series
1992(A-1/P-1)
$ 7,700,000 4.15% 01/07/97 $ 7,700,000
Wake County PCRB for Carolina Power & Light Series 1990 A (Fuji
Bank LOC)(A-2/P-1)
18,870,000 3.55 02/10/97 18,870,000
Wake County PCRB for Carolina Power & Light Series 1990 B (Fuji
Bank LOC)(A-2/P-1)
10,000,000 3.75 02/13/97 10,000,000
- -------------------------------------------------------------------
$36,570,000
- -------------------------------------------------------------------
Ohio--2.2%
Columbus Electric System RB Series 1984 (Union Bank of Switzerland
LOC)(VMIG1)
$12,000,000 3.35% 01/31/97 $12,000,000
- -------------------------------------------------------------------
Oregon--1.7%
Portland Public Grain Elevator RB for Columbia Grain, Inc. Series
1984 (Fuji Bank/Bank of Tokyo LOC)(VMIG1)
$ 9,450,000 4.25% 01/07/97 $ 9,450,000
- -------------------------------------------------------------------
Pennsylvania--0.8%
Philadelphia TRANS Series 1996-7 A(SP-1/MIG1)
$ 4,500,000 4.50% 06/30/97 $ 4,511,725
- -------------------------------------------------------------------
Puerto Rico--2.3%
Commonwealth of Puerto Rico TRANS Series 1997 A(SP-1+/MIG1)
$12,500,000 4.00% 07/30/97 $12,540,250
- -------------------------------------------------------------------
South Carolina--1.1%
York County Floating/Fixed Rate PCRB Pooled Series 1984 N, North
Carolina Electric Membership Corp. (CFC)(A-1+/MIG1)
$ 5,775,000 4.15% 01/07/97 $ 5,775,000
- -------------------------------------------------------------------
Tennessee--0.6%
Blount County PCRB for Aluminum Company of America Series 1992
(A-1)
$ 2,450,000 4.15% 01/07/97 $ 2,450,000
Bradley County VRDN for Olin Corp. Series 1993 C (Wachovia Bank of
North Carolina LOC)(A-1+)
600,000 5.25 01/01/97 600,000
- -------------------------------------------------------------------
$ 3,050,000
- -------------------------------------------------------------------
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
Statement of Investments
- -------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
- -------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
===================================================================
Texas--10.5%
Gulf Coast Waste Disposal Authority PCRB for Monsanto Corp. Series
1996(P-1)
$ 5,300,000 4.20% 01/07/97 $ 5,300,000
Harris County Hospital RB for Children's Hospital Series 1989
B-2(VMIG1)
10,000,000 4.10 01/07/97 10,000,000
Harris County Toll Road Adjustable/Fixed Rate Series 1994 C
(A-1+/VMIG1)
1,500,000 4.05 01/07/97 1,500,000
Houston GO Series A(A-1+/P-1)
5,000,000 3.50 03/12/97 5,000,000
Lower Colorado River Authority CP Notes Series C(A-1/P-1)
7,000,000 3.50 03/13/97 7,000,000
San Antonio Electric & Gas Systems CP Notes Series A(A-1+/P-1)
17,700,000 5.00 01/02/97 17,700,000
State of Texas TRANS Series 1996(SP-1+/MIG1)
10,000,000 4.75 08/29/97 10,050,571
- -------------------------------------------------------------------
$56,550,571
- -------------------------------------------------------------------
Virginia--4.6%
Louisa IDA PCRB for Virginia Electric & Power Series 1984(A-1/P-1)
$ 3,900,000 3.65% 01/24/97 $ 3,900,000
1,500,000 3.60 01/29/97 1,500,000
4,000,000 3.60 02/18/97 4,000,000
Roanoke VRDN for Carilion Health Systems Hospital Series A(A-1)
3,500,000 4.10 01/07/97 3,500,000
York County IDA PCRB for Virginia Electric & Power Series 1985
(A-1/A3)
9,000,000 3.70 01/14/97 9,000,000
2,900,000 3.60 02/05/97 2,900,000
- -------------------------------------------------------------------
$24,800,000
- -------------------------------------------------------------------
Washington--4.4%
Washington Healthcare Facility Authority VRDN for Sisters of
Providence Series 1985 B and E(A-1+/VMIG1)
$ 2,900,000 5.00% 01/01/97 $ 2,900,000
Washington Public Power Supply Project Electric RB Series 1993 A-2
(Bank of America LOC)(A-1/VMIG1)
20,880,000 4.10 01/07/97 20,880,000
- -------------------------------------------------------------------
$23,780,000
- -------------------------------------------------------------------
Wisconsin--1.5%
Milwaukee IDRB Multi-Modal for Pharmacia & Upjohn, Inc. Series
1994(P-1)
$ 8,000,000 4.60% 01/07/97 $ 8,000,000
- -------------------------------------------------------------------
Wyoming--0.3%
Converse County PCRB for Pacificorp. Series 1994(AMBAC)
(A-1/VMIG1)
$ 1,700,000 5.00% 01/01/97 $ 1,700,000
- -------------------------------------------------------------------
Total Investments $540,553,164/(a)/
===================================================================
/(a)/ The amount stated also represents aggregate cost for federal
income tax purposes.
Interest rates represent either the stated coupon rate, annualized yield on date
of purchase for discounted notes, or, for floating rate securities, the current
reset rate, which is based upon current interest rates indices.
Maturity dates represent either the stated date on the security, the next
interest reset date for floating rate securities, or the prerefunded date for
those types of securities.
Security ratings are unaudited.
The percentages shown for each investment category reflect the value of
investments in that category as a percentage of total net assets.
- ------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Statement of Investments
- --------------------------------------------------------------------------------
Financial Square Tax-Free Money Market Fund (continued)
December 31, 1996
================================================================================
Investment Abbreviations:
ACES --Adjustable Convertible Extendible
Securities
AMBAC --Insured by American Municipal Bond
Assurance Corp.
CFC --Unconditionally guaranteed by CFC, Cooperative Finance Corp.
CP --Commercial Paper
FGIC --Insured by Financial Guaranty Insurance Co.
FHLB --Federal Home Loan Bank
GO --General Obligation
IDA --Industrial Development Authority
IDB --Industrial Development Bond
IDRB --Industrial Development Revenue Bond
LOC --Letter of Credit
MBIA --Insured by Municipal Bond Investors
Assurance
MF Hsg. --Multi-Family Housing
PCRB --Pollution Control Revenue Bond
RANS --Revenue Anticipation Notes
RB --Revenue Bond
TRANS --Tax Revenue Anticipation Notes
VRDN --Variable Rate Demand Note
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
14
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=======================================================================================
<S> <C> <C> <C> <C> <C>
Assets:
Investments in securities, at value
based on amortized cost $4,373,112,279 $2,964,020,412 $ 3,106,195,212 $1,230,446,987 $540,553,164
Interest receivable 11,583,246 11,328,488 2,442,834 3,375,926 2,193,518
Cash 88,907 53,776 72,630 25,740 160,336
Deferred organization expenses, net -- 21,473 -- -- 39,662
Other assets 107,980 65,537 181,145 117,177 14,269
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 4,384,892,412 2,975,489,686 3,108,891,821 1,233,965,830 542,960,949
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Dividends payable 23,926,806 16,502,413 12,829,625 5,834,710 1,711,051
Accrued expenses and other liabilities 989,400 969,498 919,263 588,231 164,840
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 24,916,206 17,471,911 13,748,888 6,422,941 1,875,891
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets:
Paid in capital 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
Accumulated undistributed net realized
gain (loss) on investments 1,090 954 80,038 26,484 (12,859)
===================================================================================================================================
Net assets $4,359,976,206 $2,958,017,775 $3,095,142,933 $ 1,227,542,889 $541,085,058
===================================================================================================================================
Net asset value, offering and redemption
price per share (net assets/shares
outstanding) $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Outstanding:
FST shares 3,901,792,070 2,540,361,007 2,290,967,452 858,743,905 440,850,118
FST Administration shares 215,900,253 165,764,727 536,903,385 145,103,169 51,661,795
FST Service shares 115,154,059 234,380,537 220,555,465 223,556,901 19,855,446
FST Preferred shares 127,128,734 17,510,550 46,636,593 112,430 28,730,558
- -----------------------------------------------------------------------------------------------------------------------------------
Total shares of beneficial interest
outstanding, $0.01 par value
(unlimited number of shares
authorized) 4,359,975,116 2,958,016,821 3,095,062,895 1,227,516,405 541,097,917
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
==================================================================================
<S> <C> <C> <C> <C> <C>
Investment income:
Interest income $273,607,363 $168,464,120 $ 130,875,226 $69,659,598 $19,750,787
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment adviser fees 3,751,933 2,295,135 1,818,328 961,337 420,548
Account administration fees 6,503,286 3,978,642 3,152,251 1,667,071 728,870
Custodian fees 591,036 401,612 349,064 224,733 31,788
Registration fees 143,509 118,595 229,757 143,620 24,284
Trustee fees 78,242 51,602 31,550 16,933 9,385
Amortization of deferred organization expenses -- 9,065 -- -- 15,626
Other 325,076 181,947 184,245 95,419 59,633
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 11,393,082 7,036,598 5,765,195 3,109,113 1,290,134
Less--Expenses reimbursable and fees
waived by Goldman Sachs (2,388,496) (1,598,929) (1,400,520) (800,866) (302,339)
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses 9,004,586 5,437,669 4,364,675 2,308,247 987,795
Administration share fees 527,357 474,043 1,100,814 250,618 128,721
Service share fees 541,076 271,936 849,624 1,258,434 91,599
Preferred share fees 42,963 2,874 15,097 395 13,155
- ---------------------------------------------------------------------------------------------------------------------------------
Net expenses and share fees 10,115,982 6,186,522 6,330,210 3,817,694 1,221,270
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income 263,491,381 162,277,598 124,545,016 65,841,904 18,529,517
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investment
transactions 105,304 189,110 587,091 136,538 (5,995)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $263,596,685 $162,466,708 $125,132,107 $65,978,442 $18,523,522
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- -------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 263,491,381 $ 162,277,598 $ 124,545,016 $ 65,841,904 $ 18,529,517
Net realized gain (loss) on
investment transactions 105,304 189,110 587,091 136,538 (5,995)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 263,596,685 162,466,708 125,132,107 65,978,442 18,523,522
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (245,389,523) (149,928,272) (93,857,124) (48,867,861) (15,981,710)
FST Administration shares (10,697,750) (9,558,151) (21,870,105) (5,023,737) (1,593,538)
FST Service shares (5,164,431) (2,628,897) (8,020,699) (11,930,553) (522,532)
FST Preferred shares (2,239,677) (162,278) (797,088) (19,753) (431,737)
Net realized gain on investment transactions
FST shares (128,847) (173,838) (385,734) (81,682) --
FST Administration shares (5,617) (11,082) (89,882) (8,397) --
FST Service shares (2,712) (3,048) (32,963) (19,942) --
FST Preferred shares (1,177) (188) (3,276) (33) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to
shareholders (263,629,734) (162,465,754) (125,056,871) (65,951,958) (18,529,517)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 48,481,127,400 44,257,102,764 20,383,057,696 14,111,648,633 4,669,259,507
Reinvestment of dividends and
distributions 126,514,648 91,077,089 45,060,831 21,912,928 6,495,873
Cost of shares repurchased (47,756,596,271) (43,600,991,427) (19,343,068,853) (13,746,823,336) (4,623,830,243)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share
transactions 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 851,012,728 747,189,380 1,085,124,910 386,764,709 51,919,142
Net Assets:
Beginning of year 3,508,963,478 2,210,828,395 2,010,018,023 840,778,180 489,165,916
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 4,359,976,206 $2,958,017,775 $ 3,095,142,933 $1,227,542,889 $ 541,085,058
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Prime Treasury Tax-Free
Obligations Money Market Obligations Government Money Market
Fund Fund Fund Fund Fund
=========================================================================================
<S> <C> <C> <C> <C> <C>
From Operations:
Net investment income $ 247,196,840 $ 136,963,014 $ 79,821,378 $ 38,042,394 $ 13,622,900
Net realized gain (loss) on
investment transactions 95,511 7,374 781,869 65,308 (6,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from operations 247,292,351 136,970,388 80,603,247 38,107,702 13,616,036
- ------------------------------------------------------------------------------------------------------------------------------------
Distributions to shareholders from:
Net investment income
FST shares (236,894,656) (130,522,374) (63,729,881) (34,713,840) (12,702,550)
FST Administration shares (7,108,569) (6,351,769) (9,995,927) (2,917,098) (455,025)
FST Service shares (3,193,615) (88,871) (6,095,570) (411,456) (465,325)
Net realized gain on investment transactions
FST shares (55,079) (9,474) (612,499) (59,324) --
FST Administration shares (4,463) (504) (99,062) (5,878) --
FST Service shares (1,830) -- (62,143) (106) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions to shareholders (247,258,212) (136,972,992) (80,595,082) (38,107,702) (13,622,900)
- ------------------------------------------------------------------------------------------------------------------------------------
From share transactions (at $1.00 per share):
Proceeds from sales of shares 35,913,627,249 33,159,975,346 12,055,344,504 8,904,113,596 3,459,116,162
Reinvestment of dividends and
distributions 88,104,801 69,894,471 14,492,584 15,345,902 3,954,598
Cost of shares repurchased (35,375,137,049) (31,948,570,256) (11,181,309,002) (8,391,284,391) (3,161,776,879)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
resulting from share transactions 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase 626,629,140 1,281,296,957 888,536,251 528,175,107 301,287,017
Net Assets:
Beginning of year 2,882,334,338 929,531,438 1,121,481,772 312,603,073 187,878,899
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 3,508,963,478 $ 2,210,828,395 $ 2,010,018,023 $ 840,778,180 $ 489,165,916
====================================================================================================================================
Summary of Share Transactions (at $1.00 per share):
FST Shares:
Shares sold 34,469,057,699 31,539,337,948 8,859,672,375 8,279,786,329 3,135,487,639
Reinvestment of dividends and
distributions 85,898,572 66,409,325 11,189,134 14,336,357 3,262,842
Shares repurchased (34,034,050,903) (30,399,518,678) (8,241,356,158) (7,808,586,957) (2,873,945,734)
- ------------------------------------------------------------------------------------------------------------------------------------
520,905,368 1,206,228,595 629,505,351 485,535,729 264,804,747
- ------------------------------------------------------------------------------------------------------------------------------------
FST Administration shares:
Shares sold 721,501,944 1,608,362,145 1,309,118,844 331,435,289 110,334,205
Reinvestment of dividends and
distributions 761,953 3,443,404 845,389 785,525 320,945
Shares repurchased (640,480,667) (1,540,953,481) (1,108,896,222) (304,089,584) (91,758,941)
- ------------------------------------------------------------------------------------------------------------------------------------
81,783,230 70,852,068 201,068,011 28,131,230 18,896,209
- ------------------------------------------------------------------------------------------------------------------------------------
FST Service shares:
Shares sold 723,067,606 12,275,253 1,886,553,285 292,891,978 213,294,318
Reinvestment of dividends and
distributions 1,444,276 41,742 2,458,061 224,020 370,811
Shares repurchased (700,605,479) (8,098,097) (1,831,056,622) (278,607,850) (196,072,204)
- ------------------------------------------------------------------------------------------------------------------------------------
23,906,403 4,218,898 57,954,724 14,508,148 17,592,925
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in shares 626,595,001 1,281,299,561 888,528,086 528,175,107 301,293,881
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
1. Organization
Goldman Sachs Money Market Trust (the "Trust"), a business trust organized under
the laws of the Commonwealth of Massachusetts on December 6, 1978, includes the
Financial Square Funds, collectively "the Funds" or individually a "Fund". The
Trust is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. Financial Square consists of seven
diversified funds: Prime Obligations, Money Market, Treasury Obligations,
Government, Tax-Free Money Market , Municipal Money Market (inactive) and Money
Market Plus (inactive). The Financial Square Funds offer four classes of shares:
FST shares, FST Administration shares, FST Service shares and FST Preferred
shares. The investment objective of the Funds is to maximize current income to
the extent consistent with the preservation of capital and maintenance of
liquidity.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Funds. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that may affect the reported amounts.
A. Investment Valuation--
- --------------------------
Each Fund uses the amortized-cost method for valuing portfolio securities which
approximates market value. Under this method, all investments purchased at a
discount or premium are valued by amortizing the difference between the original
purchase price and maturity value of the issue over the period to maturity.
B. Interest Income--
- ---------------------
Interest income is determined on the basis of interest accrued, premium
amortized and discount earned.
C. Federal Taxes--
- -------------------
It is each Fund's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all investment company taxable and tax-exempt income to
shareholders. Accordingly, no federal tax provisions are required.
The characterization of distributions to shareholders for financial
reporting purposes is determined in accordance with federal income tax rules.
Therefore, the source of the Funds' distributions may be shown in the
accompanying financial statements as either from or in excess of net investment
income or net realized gain on investment transactions, or from paid-in capital,
depending on the type of book/tax differences that may exist.
At December 31, 1996, the Funds' tax year end, the Tax-Free Money Market
Fund had approximately $13,000 of capital loss carryforward for U.S. Federal tax
purposes. This capital loss carryforward expires in the year 2004.
D. Deferred Organization Expenses--
- ------------------------------------
Organization-related costs are being amortized on a straight-line basis over a
period of five years.
E. Expenses--
- --------------
Expenses incurred by the Funds that do not specifically relate to an individual
fund are allocated to the Funds based on each Fund's relative average net assets
for the period.
Shareholders of FST Administration, FST Service and FST Preferred shares
bear all expenses and fees paid to service organizations for their services with
respect to such shares as well as other expenses (subject to expense
limitations) that are directly attributable to such shares.
3. Agreements
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser pursuant to
an Investment Advisory Agreement. Under the Investment Advisory Agreement, GSAM,
subject to general
- --------------------------------------------------------------------------------
19
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1996
- --------------------------------------------------------------------------------
supervision of the Trust's Board of Trustees, manages the portfolios of the
Funds. As compensation for the services rendered under the Investment Advisory
Agreement and the assumption of the expenses related thereto, GSAM is entitled
to a fee, computed daily and payable monthly, at an annual rate equal to .075%
of each Fund's average daily net assets. These amounts are included in "Accrued
expenses and other liabilities" in the accompanying Statements of Assets and
Liabilities.
Until further notice, GSAM has voluntarily agreed to limit certain of each
of the Fund's expenses (excluding advisory fees, account administration fees,
service organization fees, taxes, interest, brokerage commissions and
extraordinary expenses) to the extent that such expenses exceed .01% per annum
of that Fund's average daily net assets. These amounts are included in "Other
assets" in the accompanying Statements of Assets and Liabilities.
GSAM also serves as administrator pursuant to an Administration Agreement.
Under the Administration Agreement, GSAM administers each Fund's business
affairs, including providing facilities and transfer agency services. As
compensation for the services rendered under the Administration Agreement, GSAM
is entitled to a fee, computed daily and payable monthly, at an annual rate
equal to .13% of each Fund's average daily net assets. These amounts are
included in "Accrued expenses and other liabilities" in the accompanying
Statements of Assets and Liabilities.
Goldman Sachs serves as the Distributor of shares of the Funds pursuant to a
Distribution Agreement and receives no fee. The following chart outlines the
waivers and reimbursements for the year ended December 31, 1996 and amounts owed
to affiliates and due from GSAM at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Adviser Expense Amounts Amounts
Fee Reimburs- due to due from
Fund Waived ements Total GSAM GSAM
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Prime
Obligations
Fund $1,751 $637 $2,388 $777 $108
- ---------------------------------------------------------------------
Money
Market
Fund 1,142 457 1,599 552 65
- ---------------------------------------------------------------------
Treasury
Obligations
Fund 848 553 1,401 419 155
- ---------------------------------------------------------------------
Government
Fund 449 352 801 197 117
- ---------------------------------------------------------------------
Tax-Free
Money
Market
Fund 217 85 302 86 13
- ---------------------------------------------------------------------
</TABLE>
4. Administration, Service and Preferred Plans
The Funds have adopted Administration, Service and Preferred Plans to compensate
service organizations for providing varying levels of account administration and
shareholder liaison services to their customers who are beneficial owners of
such shares. The Administration, Service and Preferred Plans provide for
compensation to the service organizations in an amount up to .25% , .50% and
.10% (on an annualized basis), respectively, of the average daily net asset
value of the respective shares.
5. Line of Credit Facility
The Funds participate in a $250,000,000 uncommitted, unsecured revolving line of
credit facility to be used solely for temporary or emergency purposes. Under the
most restrictive arrangement, each Fund must own securities having a market
value in excess of 300% of the total bank borrowings. The interest rate on the
borrowings is based on the Federal Funds rate. During the year ended December
31, 1996, the Funds did not have any borrowings under this facility.
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. Repurchase Agreements
During the term of a repurchase agreement, the value of the underlying
securities, including accrued interest, is required to equal or exceed the value
of the repurchase agreement. The underlying securities for all repurchase
agreements are held in safekeeping at the Fund's custodian.
7. Joint Repurchase Agreement Accounts
The Funds, together with other registered investment companies having advisory
agreements with GSAM or its affiliates, transfer uninvested cash balances into
joint accounts, the daily aggregate balances of which are invested in one or
more repurchase agreements. The underlying securities for the repurchase
agreements are U.S. Treasury obligations.
At December 31, 1996, the Prime Obligations, Money Market, Treasury
Obligations and Government Funds had undivided interests in the repurchase
agreements in the following joint account, which equaled $297,900,000,
$205,200,000, $1,419,100,000 and $351,600,000 in principal amount, respectively.
At December 31, 1996, the repurchase agreements in this joint account, along
with the corresponding underlying securities (including the type of security,
market value, interest rate and maturity date), were as follows:
- --------------------------------------------------------------------------
Principal Interest Maturity Amortized
Amount Rate Date Cost
- --------------------------------------------------------------------------
Repurchase Agreements
BT Securities Corp., dated 12/31/96, repurchase price $200,061,111 (U.S.
Treasury Notes: $154,133,720, 5.75%-6.38%, 08/31/97-04/30/01; U.S.
Treasury Bills: $48,126,398, 06/12/97)
$ 200,000,000 5.50% 01/02/97 $ 200,000,000
Chase Securities, Inc., dated 12/31/96, repurchase price $1,000,369,444
(U.S. Treasury Notes: $1,020,003,399, 5.00%-9.13%, 11/15/97-5/31/99)
1,000,000,000 6.65 01/02/97 1,000,000,000
Citicorp. Securities, Inc., dated 12/31/96, repurchase price $100,034,722
(U.S. Treasury Notes: $101,974,154, 5.88%-7.50%, 03/31/98-11/15/01)
100,000,000 6.25 01/02/97 100,000,000
Morgan Stanley & Co., dated 12/31/96, repurchase price $1,200,450,000
(U.S. Treasury Notes: $954,150,236, 6.00%-6.25%, 07/31/98-09/30/98;
U.S. Treasury Bills: $270,396,330, 01/23/97-10/16/97)
1,200,000,000 6.75 01/02/97 1,200,000,000
Swiss Bank Corp., dated 12/31/96, repurchase price $140,846,933 (U.S.
Treasury Notes: $129,531,177, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $14,639,156, 01/30/97-06/26/97)
140,800,000 6.00 01/02/97 140,800,000
Swiss Bank Corp., dated 12/31/96, repurchase price $400,150,000 (U.S.
Treasury Notes: $367,986,300, 4.75%-8.88%, 01/15/97-08/15/03; U.S.
Treasury Bills: $41,588,512, 01/30/97-06/26/97)
400,000,000 6.75 01/02/97 400,000,000
- --------------------------------------------------------------------------
Total Joint Repurchase Agreement Account $3,040,800,000
==========================================================================
8. Other Matters
Pursuant to an SEC exemptive order, each taxable Fund may enter into certain
principal transactions, including repurchase agreements, with Goldman, Sachs &
Co. subject to certain limitations as follows: 25% of eligible security
transactions, as defined, and 10% of repurchase agreement transactions.
21
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
December 31, 1996
- --------------------------------------------------------------------------------
9. Summary of Share Transactions
Share activity for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Tax-Free
Prime Obligations Money Market Treasury Government Money Market
Fund Fund Obligations Fund Fund Fund
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FST Shares:
Shares sold 44,941,258,260 41,611,799,874 15,303,462,361 11,674,849,553 4,186,677,890
Reinvestment of dividends and
distributions 120,569,689 84,724,371 33,617,264 19,640,980 4,879,667
Shares repurchased (44,455,790,432) (41,225,360,339) (14,633,812,470) (11,579,631,835) (4,199,081,918)
------------------------------------------------------------------------------------------------
606,037,517 471,163,906 703,267,155 114,858,698 (7,524,361)
FST Administration Shares:
Shares sold 1,718,885,581 2,097,089,351 2,868,056,191 1,074,614,378 177,906,627
Reinvestment of dividends and
distributions 2,721,453 5,879,304 4,640,302 1,055,828 844,377
Shares repurchased (1,653,602,695) (2,074,616,324) (2,618,986,546) (1,012,951,862) (148,027,716)
------------------------------------------------------------------------------------------------
68,004,339 28,352,331 253,709,947 62,718,344 30,723,288
FST Service Shares:
Shares sold 1,442,987,405 470,852,368 2,117,230,142 1,353,982,373 239,131,409
Reinvestment of dividends and
distributions 3,217,249 397,187 6,330,034 1,208,640 449,321
Shares repurchased (1,396,329,467) (241,087,916) (2,042,124,197) (1,146,142,260) (239,585,078)
------------------------------------------------------------------------------------------------
49,875,187 230,161,639 81,435,979 209,048,753 (4,348)
FST Preferred Shares:
Shares sold 377,996,154 77,361,171 94,309,002 8,202,329 65,543,581
Reinvestment of dividends and
distributions 6,257 76,227 473,231 7,480 322,508
Shares repurchased (250,873,677) (59,926,848) (48,145,640) (8,097,379) (37,135,531)
------------------------------------------------------------------------------------------------
127,128,734 17,510,550 46,636,593 112,430 28,730,558
------------------------------------------------------------------------------------------------
Net increase in shares 851,045,777 747,188,426 1,085,049,674 386,738,225 51,925,137
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights
Selected Data for a Share Outstanding Throughout Each Period
Prime Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
--------------------------------------
Ratio of net
Net asset Net realized Total Net asset expenses to
value at Net gain income from Distributions value at average
beginning investment on investment investment to end Total net
of period income transactions operations shareholders of period return(a) assets
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0529 $-- $0.0529 $(0.0529) $1.00 5.41% 0.18%
1996-FST Preferred shares/(c)/... 1.00 0.0346 -- 0.0346 (0.0346) 1.00 5.28/(b)/ 0.28/(b)/
1996-FST Administration shares .. 1.00 0.0506 -- 0.0506 (0.0506) 1.00 5.14 0.43
1996-FST Service shares ......... 1.00 0.0478 -- 0.0478 (0.0478) 1.00 4.88 0.68
1995-FST shares ................. 1.00 0.0586 -- 0.0586 (0.0586) 1.00 6.02 0.18
1995-FST Administration shares .. 1.00 0.0559 -- 0.0559 (0.0559) 1.00 5.75 0.43
1995-FST Service shares ......... 1.00 0.0533 -- 0.0533 (0.0533) 1.00 5.49 0.68
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 1.00 0.0401 -- 0.0401 (0.0401) 1.00 4.38/(b)/ 0.18/(b)/
1994-FST Administration shares/(d)/ 1.00 0.0383 -- 0.0383 (0.0383) 1.00 4.12/(b)/ 0.43/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0364 -- 0.0364 (0.0364) 1.00 3.86/(b)/ 0.68/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0311 0.0002 0.0313 (0.0313) 1.00 3.18 0.17
1994-FST Administration shares .. 1.00 0.0286 0.0002 0.0288 (0.0288) 1.00 2.92 0.42
1994-FST Service shares ......... 1.00 0.0261 0.0002 0.0263 (0.0263) 1.00 2.66 0.67
1993-FST shares ................. 1.00 0.0360 0.0007 0.0367 (0.0367) 1.00 3.75 0.18
1993-FST Administration shares/(e)/ 1.00 0.0068 0.0001 0.0069 (0.0069) 1.00 3.02/(b)/ 0.44/(b)/
1993-FST Service shares ......... 1.00 0.0301 0.0007 0.0308 (0.0308) 1.00 3.23 0.68
1992-FST shares ................. 1.00 0.0572 0.0002 0.0574 (0.0574) 1.00 5.99 0.18
1992-FST Service shares (e)...... 1.00 0.0027 -- 0.0027 (0.0027) 1.00 4.10/(b)/ 0.66/(b)/
For the Period March 8, 1990 (f)
- --------------------------------
through January 31,
- -------------------
1991-FST shares ................. 1.00 0.0727 -- 0.0727 (0.0727) 1.00 8.27/(b)/ 0.18/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Net Ratio of net
assets at Ratio of investment
end expenses to income to
of period average net average net
(in 000's) assets assets
----------------------------------------
<S> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $3,901,797 0.23% 5.24%
1996-FST Preferred shares/(c)/... 127,126 0.33/(b)/ 5.14/(b)/
1996-FST Administration shares .. 215,898 0.48 5.01
1996-FST Service shares ......... 115,154 0.73 4.73
1995-FST shares ................. 3,295,791 0.22 5.82
1995-FST Administration shares .. 147,894 0.47 5.55
1995-FST Service shares ......... 65,278 0.72 5.29
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(d)/............. 2,774,849 0.24/(b)/ 4.32/(b)/
1994-FST Administration shares/(d)/ 66,113 0.49/(b)/ 4.12/(b)/
1994-FST Service shares/(d)/..... 41,372 0.74/(b)/ 3.92/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 1,831,413 0.25 3.03
1994-FST Administration shares .. 35,250 0.50 2.78
1994-FST Service shares ......... 14,001 0.75 2.53
1993-FST shares ................. 813,126 0.25 3.53
1993-FST Administration shares/(e)/ 1,124 0.52/(b)/ 2.88/(b)/
1993-FST Service shares ......... 336 0.75 2.94
1992-FST shares ................. 917,073 0.27 5.63
1992-FST Service shares/(e)/..... 118 0.74/(b)/ 4.02/(b)/
For the Period March 8, 1990/(f)/
- ---------------------------------
through January 31,
- -------------------
1991-FST shares ................. 578,495 0.28/(b)/ 7.94/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration share and FST Service share activity commenced during
November of 1992 and January of 1992, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=================================
Net Asset Net realized Total Net asset
value at Net gain income from Distributions value at
beginning investment on investment investment to end
of period income transactions operations shareholders of period
=========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares ................. $1.00 $0.0533 $0.0001 $0.0534 $(0.0534) $1.00
1996-FST Preferred shares/(c)/... 1.00 0.0348 -- 0.0348 (0.0348) 1.00
1996-FST Administration shares .. 1.00 0.0504 0.0001 0.0505 (0.0505) 1.00
1996-FST Service shares ......... 1.00 0.0484 -- 0.0484 (0.0484) 1.00
1995-FST shares ................. 1.00 0.0589 -- 0.0589 (0.0589) 1.00
1995-FST Administration shares .. 1.00 0.0561 -- 0.0561 (0.0561) 1.00
1995-FST Service shares/(d)/..... 1.00 0.0231 -- 0.0231 (0.0231) 1.00
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 1.00 0.0305 -- 0.0305 (0.0305) 1.00
1994-FST Administration shares
/(d)/......................... 1.00 0.0298 -- 0.0298 (0.0298) 1.00
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end expenses to income to
Total average net average net of period average net average net
return/(a)/ assets assets (in 000's) assets assets
==========================================================================================
For the Year Ended December 31,
===============================
<S> <C> <C> <C> <C> <C> <C>
1996-FST shares.................. 5.45% 0.18% 5.33% $2,540,366 0.23% 5.28%
1996-FST Preferred shares/(c)/... 5.31/(b)/ 0.28/(b)/ 5.23/(b)/ 17,510 0.33/(b)/ 5.18/(b)/
1996-FST Administration shares... 5.19 0.43 5.04 165,766 0.48 4.99
1996-FST Service shares.......... 4.93 0.68 4.84 234,376 0.73 4.79
1995-FST shares................. 6.07 0.15 5.89 2,069,197 0.23 5.81
1995-FST Adminstration shares.... 5.80 0.40 5.61 137,412 0.48 5.53
1995-FST Services shares/(d)/.... 5.41/(b)/ 0.65/(b)/ 4.93/(b)/ 4,219 0.73/(b)/ 4.85/(b)/
For the Period Ended December 31,
=================================
1994-FST shares/(d)/............. 4.91/(b)/ 0.11/(b)/ 4.88/(b)/ 862,971 0.25/(b)/ 4.74/(b)/
1994-FST Adminstration shares/(d)/ 4.65/(b)/ 0.36/(b)/ 4.82/(b)/ 66,560 0.50/(b)/ 4.68/(b)/
</TABLE>
- ------------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST, FST Adminstration and FST Service share activity commenced May 18,
1994, May 20, 1994 and July 14, 1995, respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Treasury Obligations Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain (loss) from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0522 $0.0003 $0.0525 $(0.0524) $1.00 5.35%
1996-FST Preferred shares/(c)/... 1.00 0.0342 0.0001 0.0343 (0.0343) 1.00 5.24/(b)/
1996-FST Administration shares .. 1.00 0.0497 0.0002 0.0499 (0.0498) 1.00 5.09
1996-FST Service shares ......... 1.00 0.0472 0.0002 0.0474 (0.0474) 1.00 4.83
1995-FST shares ................. 1.00 0.0573 0.0005 0.0578 (0.0578) 1.00 5.96
1995-FST Administration shares .. 1.00 0.0547 0.0005 0.0552 (0.0552) 1.00 5.69
1995-FST Service shares ......... 1.00 0.0521 0.0005 0.0526 (0.0526) 1.00 5.43
For the Year Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 1.00 0.0379 (0.0001) 0.0378 (0.0378) 1.00 4.23/(b)/
1994-FST Administration shares
/(d)/.......................... 1.00 0.0388 (0.0001) 0.0387 (0.0387) 1.00 3.97/(b)/
1994-FST Service shares/(d)/..... 1.00 0.0349 (0.0001) 0.0348 (0.0348) 1.00 3.71/(b)/
For the Year Ended December 31,
- -------------------------------
1994-FST shares ................. 1.00 0.0301 0.0007 0.0308 (0.0307) 1.00 3.11
1994-FST Administration shares .. 1.00 0.0276 0.0006 0.0282 (0.0281) 1.00 2.85
1994-FST Service shares ......... 1.00 0.0251 0.0008 0.0259 (0.0256) 1.00 2.60
1993-FST shares ................. 1.00 0.0342 0.0012 0.0354 (0.0355) 1.00 3.69
1993-FST Administration shares
/(e)/.......................... 1.00 0.0009 -- 0.0009 (0.0009) 1.00 2.83/(b)/
1993-FST Service shares ......... 1.00 0.0296 0.0016 0.0312 (0.0309) 1.00 3.17
1992-FST shares ................. 1.00 0.0549 0.0015 0.0564 (0.0561) 1.00 5.84
1992-FST Service shares/(e)/..... 1.00 0.0113 0.0006 0.0119 (0.0116) 1.00 4.47/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -------------------------------------------
1991-FST shares ................. 1.00 0.0600 0.0006 0.0606 (0.0605) 1.00 8.06/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.22% $2,291,051 0.24% 5.16%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.11/(b)/ 46,637 0.34/(b)/ 5.05/(b)/
1996-FST Administration shares .. 0.43 4.97 536,895 0.49 4.91
1996-FST Service shares ......... 0.68 4.72 220,560 0.74 4.66
1995-FST shares ................. 0.18 5.73 1,587,715 0.23 5.68
1995-FST Administration shares .. 0.43 5.47 283,186 0.48 5.42
1995-FST Service shares ......... 0.68 5.21 139,117 0.73 5.16
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(d)/............. 0.18/(b)/ 4.13/(b)/ 958,196 0.25/(b)/ 4.06/(b)/
1994-FST Administration shares
/(d)/.......................... 0.43/(b)/ 4.24/(b)/ 82,124 0.50/(b)/ 4.17/(b)/
1994-FST Service shares/(d)/..... 0.68/(b)/ 3.82/(b)/ 81,162 0.75/(b)/ 3.75/(b)/
For the Years Ended January 31,
- -------------------------------
1994-FST shares ................. 0.17 3.01 812,420 0.24 2.94
1994-FST Administration shares .. 0.42 2.76 24,485 0.49 2.69
1994-FST Service shares ......... 0.67 2.51 35,656 0.74 2.44
1993-FST shares ................. 0.18 3.42 776,181 0.26 3.34
1993-FST Administration shares
/(e)/.......................... 0.43/(b)/ 2.83/(b)/ 1 0.51/(b)/ 2.75/(b)/
1993-FST Service shares ......... 0.68 2.96 5,155 0.76 2.88
1992-FST shares ................. 0.18 5.49 413,171 0.28 5.39
1992-FST Service shares/(e)/..... 0.68/(b)/ 3.77/(b)/ 3,634 0.78/(b)/ 3.67/(b)/
For the Period March 8, 1990/(f)/through January 31,
- -----------------------------------
1991-FST shares ................. 0.21/(b)/ 7.74/(b)/ 229,988 0.34/(b)/ 7.61/(b)/
- ----------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
/(e)/FST Administration and FST Service share activity commenced during January
of 1993 and October of 1991, respectively.
/(f)/Commencement of operations.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Government Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
-------------------------------------
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations unitholders period return /(a)/
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. $1.00 $0.0525 $0.0001 $0.0526 $(0.0526) $1.00 5.38%
1996-FST Preferred shares/(c)/... 1.00 0.0344 0.0001 0.0345 (0.0345) 1.00 5.26/(b)/
1996-FST Administration shares .. 1.00 0.0501 0.0001 0.0502 (0.0502) 1.00 5.12
1996-FST Service shares ......... 1.00 0.0474 0.0001 0.0475 (0.0475) 1.00 4.86
1995-FST shares ................. 1.00 0.0581 0.0001 0.0582 (0.0582) 1.00 6.00
1995-FST Administration shares .. 1.00 0.0554 0.0001 0.0555 (0.0555) 1.00 5.74
1995-FST Service shares/(d)/..... 1.00 0.0320 -- 0.0320 (0.0320) 1.00 5.40/(b)/
For the Period Ended December 31,
- ---------------------------------
1994-FST shares/(e)/............. 1.00 0.0424 -- 0.0424 (0.0424) 1.00 4.36/(b)/
1994-FST Administration shares
/(e)/.......................... 1.00 0.0426 -- 0.0426 (0.0426) 1.00 4.10/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 1.00 0.0256 0.0001 0.0257 (0.0257) 1.00 3.14/(b)/
1993-FST Administration shares
/(d)/.......................... 1.00 0.0120 0.0001 0.0121 (0.0121) 1.00 2.87/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
----------------------------
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of net investment
expenses to income to end expenses to income to
average net average net period of average net average net
assets assets (in 000's) assets assets
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
- -------------------------------
1996-FST shares ................. 0.18% 5.25% $858,769 0.24% 5.19%
1996-FST Preferred shares/(c)/... 0.28/(b)/ 5.14/(b)/ 112 0.34/(b)/ 5.08/(b)/
1996-FST Administration shares .. 0.43 5.01 145,108 0.49 4.95
1996-FST Service shares ......... 0.68 4.74 223,554 0.74 4.68
1995-FST shares ................. 0.18 5.81 743,884 0.24 5.75
1995-FST Administration shares .. 0.43 5.54 82,386 0.49 5.48
1995-FST Service shares/(d)/..... 0.68/(b)/ 5.08/(b)/ 14,508 0.74/(b)/ 5.02/(b)/
For the Period Ended December 31,
- -------------------------------
1994-FST shares/(e)/............. 0.15/(b)/ 4.64/(b)/ 258,350 0.25/(b)/ 4.54/(b)/
1994-FST Administration shares
/(e)/.......................... 0.40/(b)/ 4.67/(b)/ 54,253 0.50/(b)/ 4.57/(b)/
For the Period Ended January 31,
- -------------------------------
1993-FST shares/(d)/............. 0.08/(b)/ 3.10/(b)/ 44,697 0.59/(b)/ 2.59/(b)/
1993-FST Administration shares
/(d)/.......................... 0.35/(b)/ 2.85/(b)/ 14,126 0.76/(b)/ 2.44/(b)/
- ---------------
</TABLE>
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced April 6, 1993, September 1, 1993 and May 16, 1995, respectively.
/(e)/The information presented reflects eleven months of operations due to a
change in fiscal year end. This change was caused by the reorganization of
the funds as a series of Goldman Sachs Money Market Trust.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
Goldman Sachs Money Market Trust--Financial Square Funds
- --------------------------------------------------------------------------------
Financial Highlights (continued)
Selected Data for a Share Outstanding Throughout Each Period
Tax-Free Money Market Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from investment operations
=====================================
Net Net Total
asset realized income Net asset
value at Net gain on from Distributions value at
beginning investment investment investment to end of Total
of period income transactions operations shareholders period return /(a)/
===========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... $1.00 $0.0335 -- $0.0335 $(0.0335) $1.00 3.39%
1996-FST Preferred shares /(c)/....... 1.00 0.0218 -- 0.0218 (0.0218) 1.00 3.30/(b)/
1996-FST Administration shares ....... 1.00 0.0310 -- 0.0310 (0.0310) 1.00 3.13
1996-FST Service shares .............. 1.00 0.0285 -- 0.0285 (0.0285) 1.00 2.88
1995-FST shares ...................... 1.00 0.0381 -- 0.0381 (0.0381) 1.00 3.89
1995-FST Administration shares ....... 1.00 0.0354 -- 0.0354 (0.0354) 1.00 3.63
1995-FST Service shares .............. 1.00 0.0332 -- 0.0332 (0.0332) 1.00 3.38
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 1.00 0.0156 -- 0.0156 (0.0156) 1.00 3.41/(b)/
1994-FST Administration shares /(d)/.. 1.00 0.0136 -- 0.0136 (0.0136) 1.00 3.19/(b)/
1994-FST Service shares /(d)/......... 1.00 0.0091 -- 0.0091 (0.0091) 1.00 3.11/(b)/
<CAPTION>
Ratios assuming no
waiver of fees and no
expense limitations
============================
Ratio of net Net Ratio of net
Ratio of net investment assets at Ratio of investment
expenses to income to end of expenses to income to
average net average net period average net average net
assets assets (in 000's) assets assets
===========================================================================
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31,
===============================
1996-FST shares ...................... 0.18% 3.35% $440,838 0.23% 3.30%
1996-FST Preferred shares /(c)/....... 0.28/(b)/ 3.26/(b)/ 28,731 0.33/(b)/ 3.21/(b)/
1996-FST Administration shares ....... 0.43 3.10 51,661 0.48 3.05
1996-FST Service shares .............. 0.68 2.85 19,855 0.73 2.80
1995-FST shares ...................... 0.14 3.81 448,367 0.24 3.71
1995-FST Administration shares ....... 0.39 3.54 20,939 0.49 3.44
1995-FST Service shares .............. 0.64 3.32 19,860 0.74 3.22
For the Period Ended December 31,
=================================
1994-FST shares /(d)/................. 0.07/(b)/ 3.42/(b)/ 183,570 0.31/(b)/ 3.18/(b)/
1994-FST Administration shares /(d)/.. 0.32/(b)/ 3.25/(b)/ 2,042 0.56/(b)/ 3.01/(b)/
1994-FST Service shares /(d)/......... 0.57/(b)/ 3.32/(b)/ 2,267 0.81/(b)/ 3.08/(b)/
</TABLE>
- ---------------
/(a)/Assumes investment at the net asset value at the beginning of the period,
reinvestment of all distributions and a complete redemption of the
investment at the net asset value at the end of the period.
/(b)/Annualized.
/(c)/FST Preferred share activity commenced on May 1, 1996.
/(d)/FST share, FST Administration share and FST Service share activity
commenced July 19, 1994, August 1, 1994 and September 23, 1994,
respectively.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
- --------------------------------------------------------------------------------
Report of Independent Public Accountants
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of the Goldman Sachs Money Market
Trust--Financial Square Funds:
We have audited the accompanying statements of assets and liabilities of the
Goldman Sachs Money Market Trust--Financial Square Funds (a Massachusetts
business trust comprising the Prime Obligations, Money Market, Treasury
Obligations, Government and Tax-Free Money Market Funds), including the
statements of investments, as of December 31, 1996, and the related statements
of operations, and the statements of changes in net assets and the financial
highlights for each of the periods presented. These financial statements and the
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios constituting Goldman Sachs Money
Market Trust--Financial Square Funds as of December 31, 1996, the results of
their operations and the changes in their net assets and the financial
highlights for the periods presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 10, 1997
- ------------------------------------- ---------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
- -------------------------------------- ----------------------------------------
[This page intentionally left blank]
- -------------------------------------- ----------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
- ------------------------------------- -----------------------------------------
- --------------------------------------------------------------------------------
This Annual Report is authorized for distribution to prospective investors only
when preceded or accompanied by a Goldman Sachs Money Market Trust--Financial
Square Funds Prospectus which contains facts concerning each Fund's objectives
and policies, management, expenses and other information.
- --------------------------------------------------------------------------------
31
<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.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered a super-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Moody's applies numerical modifiers 1, 2, and 3 in the Aa and A categories. The
modifier 1 indicates that the obligation ranks in the higher end of the
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of the respective category.
- --------------------------------------------------------------------------------
* 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 often be evidenced
by many of the following charac teristics:
. Leading market positions in well established indus tries.
. 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/VMIG 1 -- This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broadbased access to the market for refinancing.
MIG 2/VMIG 2 -- This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
A short-term rating may also be assigned on an issue having a demand feature-
variable rate demand obligation. Such ratings will be designated as VMIG to
reflect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally,
investors
A-2
<PAGE>
should be alert to the fact that the source of payment may be limited to the
external liquidity with no or limited legal recourse to the issuer in the event
the demand is not met.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
PLUS (+) OR MINUS (-): The AA and A ratings may be modified by the addition of
a plus or minus sign to show relative standing within the category.
Short-Term Ratings
- ------------------
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated A-2 is somewhat more suscep tible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
Municipal Notes
- ---------------
A Standard & Poor's note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
. Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
A-3
<PAGE>
. Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 -- Strong capacity to pay principal and interest. Those issues determined
to possess very strong characteristics will be given a plus (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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: The highest credit quality. The risk factors are negligi ble, being only
slightly more than for risk-free U.S. Treasury debt.
AA: High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A: Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Duff & Phelps applies modifiers, + and - in the AA and A catego ries for long-
term fixed securities. The modifier + indicates that the security ranks in the
higher end of the category; the modifier AA or A indicates a mid-range ranking;
and the modifier - indicates that the issue ranks in the lower end of the
category.
A-4
<PAGE>
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 requirements, access to capital markets is good and risk factors
are small.
Duff & Phelps applies a plus and minus rating scale, D-1+, D-1 and D-1- in the
Duff 1 top grade category for short-term debt. The rating D-1+ indicates that
the security has the highest certainty of timely payment, short-term liquidity
is clearly 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 fore-
seeable future developments, short-term debt of these issuers is generally rated
"F-1+".
A: Bonds which are rated A are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
Fitch applies plus (+) and minus (-) modifiers in the AA and A categories to
indicate the relative position of a credit within the rating category. The
modifier AA+ indicates that the security ranks at the higher end of the AA
category than a security rated AA or AA- .
A-5
<PAGE>
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1: Short-term debt obligations rated F-1 are considered to be of very strong
credit quality. Those issues determined to possess exceptionally strong credit
quality and having the strongest degree of assurance for timely payment will be
denoted with a plus ("+") sign designation.
F-2: Short-term debt obligations rated F-2 are considered to be of good credit
quality. Issues assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
IBCA LIMITED AND IBCA INC.
A1: Short-term obligations rated A1 are supported by the highest capacity for
timely repayment. Where issues possess a particu larly strong credit feature a
rating of A1+ is assigned.
A2: Short-term obligations rated A2 are supported by a satisfac tory 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 an extremely high ability to repay
principal and interest on a timely basis.
AA:The second highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A: The third highest category; indicates the ability to repay principal and
interest is strong. Issuer rated A could be more vulnerable to adverse
developments (both internal an external) than obligations with higher ratings.
Ratings in the AA and A Long-Term Debt categories may include a plus (+) or
minus (-) designation which indicates where within the respective category the
issue is placed.
The TBW Short-Term Ratings apply only to specific debt instruments that have a
maturity of one year or less.
A-6
<PAGE>
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal and interest.
TBW-1: The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.
TBW-2: The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
A-7
